Filed 2025-04-15 · Period ending 2024-12-31 · 133,640 words · SEC EDGAR
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# Hyperscale Data, Inc. (GPUS) — 10-K
**Filed:** 2025-04-15
**Period ending:** 2024-12-31
**Accession:** 0001214659-25-005868
**Source:** [SEC EDGAR](https://www.sec.gov/Archives/edgar/data/896493/000121465925005868/)
**Origin leaf:** aa133fb7d42caaffd494da33130ca46435af3acee3dcf0ea2c4df3a06b2df9c9
**Words:** 133,640
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**
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION**
**Washington, D.C.
20549**
**FORM 10-K**
x **ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
**For the Fiscal Year Ended December 31, 2024**
**or**
**TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934**
For
the transition period from _____________ to ________________
Commission file number 1-12711
**HYPERSCALE DATA, INC.**
(Exact name of registrant as specified in its charter)
|
Delaware |
94-1721931 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
|
|
| |
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11411 Southern Highlands Pkwy, Suite 190,
Las Vegas, NV |
89141 |
(949) 444-5464 | |
|
(Address of principal executive offices) |
(Zip Code) |
(Registrants telephone number, including area code) | |
Securities registered pursuant to Section 12(b)
of the Act:
|
Title of each class |
|
Trading symbol(s) |
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Name of each exchange on which registered | |
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Class A Common Stock, $0.001 par value per share |
|
GPUS |
|
NYSE American | |
|
13.00% Series D Cumulative Redeemable Perpetual Preferred Stock, par value $0.001 per share |
|
GPUS PD |
|
NYSE American | |
Securities registered pursuant to Section 12(g)
of the Act:None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule405 of the Securities Act.YesNo
x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section13 or Section15(d)of the Exchange
Act.YesNo
x
Indicate
by check mark whether the registrant (1)has filed all reports required to be filed by Section13 or 15(d)of the Securities
Exchange Act of 1934 during the preceding year (or for such shorter period that the registrant was required to file such reports), and
(2)has been subject to such filing requirements for the past 90days. YesxNo
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T ( 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). YesxNo
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of large accelerated filer, accelerated filer, smaller reporting company,
and emerging growth company in Rule12b-2 of the Exchange Act.
|
Largeacceleratedfiler |
Acceleratedfiler | |
|
Non-accelerated filerx |
Smallerreportingcompany x | |
|
Emerging growth company |
| |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant has filed a report on and attestation to its managements assessment of the effectiveness of
its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report.
| | | |
| | |
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements.
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrants
executive officers during the relevant recovery period pursuant to 240.10D-1(b).
Indicate
by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).YesNo
x
As of June 28, 2024 (the last business day of
the registrants most recently completed second fiscal quarter), the aggregate market value of the registrants Class A common
stock held by non-affiliates of the registrant was $10.4million based on the closing sale price on June 28, 2024 as reported on
the NYSE American of $10.143.Shares of the registrants Class A common stock held by executive officers, directors or 10%
beneficial owners and by each other person who may be deemed to be an affiliate of the registrant have been excluded from this computation.
This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose.
There were 1,529,995
shares of Class A common stock outstanding as of April 14, 2025.
**Documents incorporated by reference:**None
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| | |
**HYPERSCALE DATA, INC. AND
SUBSIDIARIES**
****
**FORM 10-K**
****
**FOR THE FISCAL YEAR ENDED DECEMBER 31, 2024**
****
**INDEX**
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Page | |
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PART I |
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Item 1. |
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Business |
1 | |
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Item 1A. |
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Risk Factors |
31 | |
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Item 1B. |
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Unresolved Staff Comments |
67 | |
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Item 1C. |
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Cybersecurity |
67 | |
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Item 2. |
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Properties |
69 | |
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Item 3. |
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Legal Proceedings |
69 | |
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Item 4. |
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Mine Safety Disclosures |
70 | |
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PART II |
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| |
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Item 5. |
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Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
71 | |
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Item 6. |
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[Reserved] |
71 | |
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Item 7. |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
71 | |
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Item 7A. |
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Quantitative and Qualitative Disclosures About Market Risk |
82 | |
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Item 8. |
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Financial Statements and Supplementary Data |
F-1 F-54 | |
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Item 9. |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
82 | |
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Item 9A. |
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Controls and Procedures |
83 | |
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Item 9B. |
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Other Information |
84 | |
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Item 9C. |
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
84 | |
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PART III |
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| |
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Item 10. |
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Directors, Executive Officers and Corporate Governance |
85 | |
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Item 11. |
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Executive Compensation |
90 | |
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Item 12. |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
97 | |
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Item 13. |
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Certain Relationships and Related Transactions, and Director Independence |
98 | |
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Item 14. |
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Principal Accountant Fees and Services |
104 | |
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PART IV |
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Item 15. |
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Exhibits and Financial Statement Schedules |
105 | |
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Item 16. |
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Form 10-K Summary |
109 | |
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Signatures |
110 | |
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**CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS**
This Annual Report on Form 10-K (the Annual
Report) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of
the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance. We have
attempted to identify forward-looking statements by terminology including anticipates, believes, expects,
can, continue, could, estimates, expects, intends,
may, plans, potential, predict, should or will or
the negative of these terms or other comparable terminology. These statements are only predictions; uncertainties and other factors may
cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Our expectations are as of the date this Annual Report is filed, and we do not intend to update any of the forward-looking statements
after the date this Annual Report is filed to confirm these statements to actual results, unless required by law.
This Annual Report also contains estimates and
other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves
a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified
the statistical and other industry data generated by independent parties and contained in this Annual Report and, accordingly, we cannot
guarantee their accuracy or completeness, though we do generally believe the data to be reliable. In addition, projections, assumptions
and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a
high degree of uncertainty and risk due to a variety of factors, including those described in Risk Factors and elsewhere
in this Annual Report. These and other factors could cause results to differ materially from those expressed in the estimates made by
the independent parties and by us.
**RISK FACTOR SUMMARY**
Below
is a summary of the principal factors that make an investment in our securities speculative. This summary does not address all of the
risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found
below under the heading Risk Factors and should be carefully considered, together with other information in this Annual
Report and our other filings with the U.S. Securities and Exchange Commission (SEC) before making investment decisions regarding
our securities.
|
| We will need to raise additional capital to fund our operations in furtherance
of our business plan. | |
|
| We have an evolving business model, which increases the complexity of our
business. | |
|
| Our Bitcoin mining operations present a number of risks, which are delineated
in the Risk Factors section. | |
|
| We are highly reliant on the price of Bitcoin and the level of demand for,
and financial performance of, Bitcoin. | |
|
| Our holding company model presents certain additional risks, which are delineated
in the Risk factors section. | |
|
| Our growth strategy is subject to a significant degree of risk. | |
|
| We are heavily dependent on our senior management, and a loss of a member
of our senior management team could cause our stock price to suffer. | |
|
| If we fail to anticipate and adequately respond to rapid technological changes
in our industry, including evolving industry-wide standards, in a timely and cost-effective manner, our business, financial condition
and results of operations would be materially and adversely affected. | |
|
| We are subject to risks related to governmental
regulation and enforcement with respect to Bitcoin mining, including: | |
|
| Regulatory changes or actions may restrict the use of bitcoins or the operation of the Bitcoin network
in a manner that adversely affects an investment in our securities; | |
|
| Due to the unregulated nature and lack of transparency surrounding the operations of many bitcoin trading
venues, they may experience fraud, security failures or operational problems, which may adversely affect the value of our bitcoin; | |
| | | |
| | |
|
| If regulatory changes or interpretations require the regulation of bitcoins under the Securities Act and
the Investment Company Act of 1940, as amended (the Investment Act) by the SEC, we may be required to register and comply
with such regulations. To the extent we decide to continue operations, the required registrations and regulatory compliance steps may
result in extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. Any disruption of our operations
in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors. This would likely have a material
adverse effect on us and investors may lose their investment; and | |
|
| Changing environmental regulation and public energy policy may expose our business to new risks. | |
|
| We may be significantly impacted by developments
and changes in laws and regulations, including increased regulation of the industry in which we operate through legislative action and
revised rules and standards applied by The Financial Crimes Enforcement Network under the authority of the U.S. Bank Secrecy Act. | |
|
| If we do not continue to satisfy the NYSE American
continued listing requirements, our securities could be delisted from NYSE American. | |
|
| Our
Class A common stock and Series D Preferred Stock prices are volatile | |
| | | |
| | |
**PART I**
|
ITEM 1. | BUSINESS | |
**Company Overview**
Hyperscale Data, Inc., a Delaware
corporation formerly known as Ault Alliance, Inc., was incorporated in September 2017. Through our wholly and majority owned subsidiaries
and strategic investments, we own and/or operate data centers at which we mine Bitcoin and offer colocation and hosting services for the
emerging artificial intelligence (AI) ecosystems and other industries as well as provide mission-critical products that
support a diverse range of industries, including an artificial intelligence software platform, a social gaming platform, equipment rental
services, defense/aerospace, industrial, automotive, medical/biopharma and hotel operations. Our direct and indirect wholly owned subsidiaries
include (i) Sentinum, Inc. (Sentinum), (ii) Alliance Cloud Services, LLC (ACS) and (iii) BNI Montana, LLC
(BNI Montana).
We own Ault Capital Group,
Inc. (Ault Capital), which either wholly owns or has a direct controlling interest in, among other entities, (i) Ault Lending,
LLC (Ault Lending), (ii) RiskOn International, Inc., formerly known as BitNile Metaverse, Inc. (ROI), which
wholly owns BitNile.com, Inc. (BNC), (iii) askROI, Inc. (askROI), (iv) Ault Global Real Estate Equities, Inc.
(AGREE), (v) Eco Pack Technologies, Inc. (Eco Pack), (vi) Ault Aviation, LLC (Ault Aviation),
(vii) Circle 8 Holdco LLC (Circle 8 Holdco), which wholly owns Circle 8 Crane Services, LLC (Circle 8) and
(viii) TurnOnGreen, Inc. (TurnOnGreen), which wholly owns TOG Technologies, Inc. (TOG Technologies) and Digital
Power Corporation (Digital Power).
We were founded by Milton
C. (Todd) Ault, III, our Executive Chairman, and are led by Mr. Ault, William B. Horne, our Chief Executive Officer and Vice Chairman,
and Henry Nisser, our President and General Counsel. Together, they constitute the Executive Committee, which manages the day-to-day operations
of the holding company. Our long-term objective is to maximize per share intrinsic value. All major investment and capital allocation
decisions are made for us by Mr. Ault and the Executive Committee.
We currently have the following
reportable segments, though it should be noted that we are in the process of transitioning our data centers away from Bitcoin mining to
operations dedicated to high-performance computing (HPC) and AI purposes:
|
| Technology and Finance (Fintech): commercial lending and trading through Ault Lending; | |
|
| Sentinum: Bitcoin mining operation and data center operations through ACS; | |
|
| AGREE hotel operations and other commercial real estate holdings; | |
|
| Energy and Infrastructure (Energy): crane rental and lifting solutions provider for oilfield,
construction, commercial and infrastructure markets through Circle 8; | |
|
| ROI: includes askROI, which operates a unique, generative AI-driven platform engineered to provide pertinent
and unique data insights through integration with business specific data that pushes beyond the conventional uses of existing large language
models as well as RiskOn, which owns 100% of BNC, which operates a social gaming platform; and | |
|
| TurnOnGreen: commercial electronics solutions with operations conducted by Digital Power, and electric
vehicle (EV) charging solutions through TOG Technologies. | |
We operate as a holding company
with operations conducted primarily through our subsidiaries, which are described below.
**Recent Events and Developments**
On June 4, 2024, we entered
into a Loan Agreement (the 2024 Credit Agreement) with OREE Lending Company, LLC and Helios Funds LLC, as lenders (Lenders).
Each Lender is a 50% member of (and thus affiliate of) Orion Equity Partners, LLC (Orion). The 2024 Credit Agreement provided
for an unsecured, non-revolving credit facility in an aggregate principal amount of up to $20.0 million, provided, however, that at no
point shall we be allowed to have outstanding loans under the 2024 Credit Agreement in a principal amount received of more than $2.0 million
(unless otherwise allowed by Lenders in their sole discretion). All loans under the 2024 Credit Agreement were due December 4, 2024. The
Lenders are not obligated to make any further loans under the 2024 Credit Agreement after the maturity date described above. Loans under
the 2024 Credit Agreement are evidenced by promissory notes (the Promissory Notes) and have an original issuance discount
of 20% to the amount of each loan and all Promissory Notes, originally bore interest at the rate of 15.0% per annum and may be repaid
at any time without penalty or premium.
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Under the 2024 Credit Agreement,
the Lenders loaned to us $1.5 million on June 4, 2024, $0.5 million on June 20, 2024 and $1.5 million on or about July 2, 2024. As of
the date of this Annual Report, we have repaid $2.0 million to the Lenders. On January 9, 2025, we and each Lender amended (a) the 2024
Credit Agreement whereby, among other things, upon the effectiveness of a registration statement, the 2024 Credit Agreement shall terminate
and be of no further force and effect, (b) the notes whereby no additional interest (other than the 20% OID) shall accrue on such notes.
As a result of these amendments, the aggregate amount payable to the Lenders by us, above the principal amount of $3.5 million under the
2024 Credit Agreement, is $0.7 million.
On June 20, 2024, we entered
into the ELOC Purchase Agreement, as amended (as amended, the Purchase Agreement) with Orion, pursuant to which Orion has
committed to purchase up to an aggregate of $37.5million of shares of 13.00% Series D Cumulative Redeemable Perpetual Preferred
Stock, par value $0.001 per share (Series D Preferred Stock), subject to certain limitations and conditions set forth in
the Purchase Agreement. The shares of our Series D Preferred Stock that may be issued under the Purchase Agreement may be sold by us to
Orion at our discretion from time to time during the term of the Purchase Agreement.
On July 18, 2024, we entered
into a note purchase agreement with an institutional investor pursuant to which the institutional investor agreed to acquire, and we agreed
to issue and sell in a registered direct offering to the institutional investor, a $5.4 million 10% OID Convertible Promissory Note (the
OID Note). The OID Note was sold to the institutional investor for a purchase price of $4.9million, an original issue
discount of $0.5 million. The OID Note will accrue interest at the rate of 15% per annum, unless an event of default occurs, at which
time the OID Note would accrue interest at 18% per annum. The OID Note matured on October 19, 2024. In addition, the OID Note is convertible
into shares of our Class A common stock at a conversion price of $5.867 per share (the OID Conversion Price), subject to
adjustment. On December 10, 2024, we entered into a forbearance agreement with the investor pursuant to which the investor agreed to forebear
through the close of business on December 31, 2024, from exercising the rights and remedies it is entitled to under the OID Note, and
we issued the investor a convertible promissory note in the amount of $0.9 million (the Forbearance Note). The Forbearance
Note was convertible into shares of Class A common stock at a conversion price equal to $5.47, subject to adjustment. The Forbearance
Note accrued interest at the rate of 18% per annum and matured on February 15, 2025. On February 25, 2025, pursuant to an amended and
restated forbearance agreement we entered into with the institutional investor, we issued to the investor an amended and restated convertible
promissory notein the amount of $3.5 million(the A&R Forbearance Note),consisting of (i) the amount
then due under the forbearance note of $0.9 million, (ii) a forbearance extension fee of $0.3 million and (iii) a true-up amount of $2.3
million.The A&R Forbearance Note shall be convertible into shares of Class A common stock at a conversion price equal to $2.00.TheA&R
ForbearanceNote will accrue interest at the rate of 18% per annum and mature on May 15, 2025. In exchange, the investor agreed to
forbear through the close of business on May 15, 2025, from exercising any rights and remedies under the $5.4 million 10% OID Convertible
Promissory Note we previously issued to the investor on July 19, 2024 and any related transaction documents.
In October 2024, pursuant
to the securities purchase agreement we entered into with Ault & Company, dated as of November 6, 2023 (the November 2023 SPA),
we sold an aggregate of 1,400 shares of Series C Convertible Preferred Stock and warrants to purchase an aggregate of 11,825 shares of
Class A common stock to Ault & Company, for an aggregate purchase price of $1.4 million.
In November 2024, pursuant
to the November 2023 SPA we entered into with Ault & Company, we sold an aggregate of 1,280 shares of Series C Convertible Preferred
Stock and warrants to purchase an aggregate of 10,811 shares of Class A common stock to Ault & Company, for an aggregate purchase
price of $1.3 million.
On December 9, 2024, we completed
the distribution of 650,000 shares of our 10% Series E Redeemable Perpetual Preferred Stock (the Series E Preferred Stock),
a $16.25 million stated value, to holders of Class A common stock and Series C Convertible Preferred Stock on an as-converted basis. Dividends
will accrue on the stated amount of $25.00 per share of the Series E Preferred Stock at a rate per annum equal to 10.00%.
On December 16, 2024, we completed
the distribution of approximately 5.0 million shares of our Class B common stock (the Class B Common Stock) to all holders
of our Class A common stock and Series C Convertible Preferred Stock on an as-converted basis. There is currently no public trading market
for the Class B Common Stock. While we presently intend to seek to have the Class B Common Stock listed for trading on the NYSE American
within the foreseeable future, there can be no assurance when, or if, such a listing will occur. The Class B Common Stock is identical
to the currently outstanding Class A common stock, with the exception that each share thereof carries 10 times the voting power of a share
of Class A common stock. The Class B Common Stock is convertible at any time into Class A common stock on a one-for-one basis.
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| | |
On November 20, 2024, pursuant
to the approval provided by our stockholders at the annual meeting of stockholders held on June 28, 2024, we filed an Amendment to our
Certificate of Incorporation with the State of Delaware to effectuate a reverse stock split of our Class A common stock affecting the
issued and outstanding number of such shares by a ratio of one-for-thirty-five. The reverse stock split became effective on November 22,
2024. All share amounts in this Annual Report have been updated to reflect the reverse stock split.
On December 23, 2024, we completed the distribution of 1.0 million
shares of our Series F Exchangeable Preferred Stock (Series F Preferred Stock) to holders of Class A common stock and Series
C Convertible Preferred Stock on an as-converted basis. The Series F Preferred Stock has a $1.00 liquidation preference and does not pay
a dividend. Each share of Series F Preferred Stock will be exchangeable, at the option of its holder, for (i) 10 shares of Class A Common
Stock of Ault Capital and (ii) five shares of Class B Common Stock of Ault Capital, at any time beginning on the later of (i) one year
after issuance of the Series F Preferred Stock and (ii) the date of the registration under the Securities Act of 1933, as amended, of
all of the foregoing shares of Ault Capital Class A Common Stock and Ault Capital Class B Common Stock. Once the Series F Preferred Stock
has been exchanged into shares of Ault Capital Class A Common Stock and Class B Common Stock, our sole business will be our ownership
of Sentinum, Inc., through which we operate our Bitcoin mining business as well as its HPC and AI operations.
In December 2024, pursuant to the November
2023 SPA we entered into with Ault & Company, we sold an aggregate of 3,020 shares of Series C Convertible Preferred Stock and warrants
to purchase an aggregate of 25,509 shares of Class A common stock to Ault & Company, for an aggregate purchase price of $3.0 million.
As of the date of this Annual Report, Ault & Company has purchased an aggregate of 50,000 shares of Series C Convertible Preferred
Stock and warrants to purchase an aggregate of 422,337 shares of Class A common stock, for an aggregate purchase price of $50.0 million.
On December 13, 2024 (the Closing Date), Third Avenue
Apartments LLC (Third Avenue), which was a subsidiary of AGREE, completed the sale of its real property located at the southeast
corner of 5th Street North and 3rd Avenue North in St. Petersburg, Florida (the Property). The Property was sold on the
Closing Date to Cats Mirror Lake, LLC (the Buyer) pursuant to a contract of sale, as amended, entered into by Third Avenue
and the Buyer. The sale price for the property was $13.0 million. In February 2025, Third Avenue filed a certificate of cancellation with
the Delaware Secretary of State.
On December 21, 2024, we entered
into a securities purchase agreement (the December 2024 SPA) with Ault & Company, pursuant to which we agreed to sell,
in one or more closings, to Ault & Company up to 25,000 shares of Series G convertible preferred stock (Series G Preferred
Stock) and warrants to purchase up to 4.2 million shares of Class A common stock (the Series G Warrants) for a total
purchase price of up to $25.0 million. The December 2024 SPA provides that the financing may be conducted through one or more closings.
Through April 14, 2025, pursuant to the December 2024 SPA, we have sold to Ault & Company 960 shares of Series G Preferred Stock and
Series G Warrants to purchase 162,217 shares of Class A common stock, for a purchase price of $1.0 million.
Each share of Series G Preferred
Stock has a stated value of $1,000.00 and is convertible into shares of Class A common stock at a conversion price equal to the greater
of (i) $0.10 per share, and (ii) the lesser of (A) $6.74 or (B) 105% of the volume weighted average price of the Class A common stock
during the ten trading days immediately prior to the date of conversion. The holders of Series G Preferred Stock are entitled to cumulative
cash dividends at an annual rate of 9.5%, or $95.00 per share, based on the stated value per share. Dividends shall accrue for 10 years
from the date of issuance of such shares of Series G Preferred Stock and are payable monthly in arrears. For the first two years, we may
elect to pay the dividend amount in shares of Class A common stock rather than cash. The holders of the Series G Preferred Stock are entitled
to vote with the Class A common stock as a single class on an as-converted basis.
On February 5, 2025, we entered into an
exchange agreement with an institutional investor, pursuant to which we issued to the investor a convertible promissory note in the principal
face amount of $1.9 million (the February 2025 Convertible Note), in exchange for the cancellation of an outstanding term
note we issued to the investor in April 2024. That note had an outstanding principal amount and accrued but unpaid interest of $1.9 million.
The February 2025 Convertible Note accrued interest at the rate of 15% per annum, unless an event of default (as defined in the
February 2025 Convertible Note) occurs, at which time the February 2025 Convertible Note would accrue interest at 18% per annum. The February
2025 Convertible Note was to mature on May 5, 2025. The February 2025 Convertible Note was convertible into shares of Class A common stock
at a fixed conversion price of $4.00 per share.
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| | |
On March 14, 2025, we entered into an exchange
agreement with an institutional investor pursuant to which we issued to the investor a convertible promissory note in the principal face
amount of $4.2 million in exchange for the cancellation of (i) a term note issued by us on May 16, 2024, with outstanding principal and
accrued but unpaid interest of $0.7 million, (ii) a term note issued by us on May 20, 2024, with outstanding principal and accrued but
unpaid interest of $1.5 million, and (iii) the February 2025 Convertible Note issued by us on February 5, 2025, with outstanding principal
and accrued but unpaid interest of $2.0 million. The note accrues interest at the rate of 15% per annum, unless an event of default (as
defined in the note) occurs, at which time the note would accrue interest at 18% per annum. The note will mature on June 30, 2025. The
note is convertible into shares of Class A common stock at a conversion price equal to the greater of (i) $0.40 per share (the Floor
Price) and (ii) the lesser of 75% of the VWAP (as defined in the note) of the class A common stock during the five trading days
immediately prior to (A) the date of issuance of the note or (B) the date of conversion into shares of class A common stock.
On March 21, 2025, we entered into an exchange
agreement with an institutional investor, pursuant to which we issued to the investor a convertible promissory note in the principal face
amount of $4.9 million (the Exchange Note) in exchange for the cancellation of (i) a term note issued by us on January 14,
2025, with outstanding principal and accrued but unpaid interest of $2.6million, (ii) a promissory note issued by us on March 7,
2025, with outstanding principal and accrued but unpaid interest of $0.5million, (iii) a promissory note issued by us on March 12,
2025, with outstanding principal and accrued but unpaid interest of $1.5million, and (iv) a promissory note issued by us on March
13, 2025, with outstanding principal and accrued but unpaid interest of $0.3 million. The Exchange Note accrues interest at the rate of
15% per annum, unless an event of default (as defined in the Exchange Note) occurs, at which time the note would accrue interest at 18%
per annum. The Exchange Note will mature on December 31, 2025. The note is convertible into shares of Class A common stock at a conversion
price equal to the greater of (i) the Floor Price and (ii) the lesser of 75% of the VWAP (as defined in the Exchange Note) of the Class
A common stock during the five trading days immediately prior to (A) the date of issuance of the Exchange Note or (B) the date of conversion
into shares of Class A common stock, but not greater than $10.00 per share.
On March 28, 2025, our
majority owned subsidiary, Avalanche International Corp. (AVLP), filed a petition
for liquidation under Chapter 7 of the bankruptcy laws. The filing placed AVLP under the control of the bankruptcy court, which will oversee
its liquidation. As a result, we no longer consider AVLP a subsidiary of ours.
On March 30, 2025, we entered into an amendment
to the November 2023 SPA to provide for an extension of the date on which the final closing may occur from December 31, 2024 to March
31, 2025, subject to Ault & Companys ability to further extend such date for ninety (90) days.
On March 31, 2025, we entered into a securities
purchase agreement with an institutional investor pursuant to which we agreed to sell up to 50,000 shares of Series B Convertible Preferred
Stock (Series B Preferred Stock) for a total purchase price of up to $50.0million. The securities purchase agreement
provides that the transaction shall be conducted through 49 separate tranche closings, provided, however, that the investor has the ability,
exercisable in its sole discretion, to purchase any number of shares of Series B Preferred Stock prior to the dates of the tranche closings
provided for in the securities purchase agreement. The initial tranche closing, which will close promptly after the investor has converted
out of the Exchange Note, will consist of the sale and issuance to the investor of 2,000 shares of Series B Preferred Stock for an aggregate
of $2.0 million. Pursuant to the securities purchase agreement, provided certain closing conditions have been met, the investor shall
purchase up to 4,800 shares of Series B Preferred Stock on a monthly basis, with the investor being required to purchase 1,000 shares
per month.
Each share of Series B Preferred Stock has a stated value of $1,000.00
and is convertible into shares of Class A common stock at a conversion price equal the lesser of a 25% discount to our volume weighted
average price during the five trading days immediately prior to (A) the date of execution of the securities purchase agreement or (B)
the date of conversion into shares of Class A common stock, but not greater than $10.00 per share. Notwithstanding the foregoing, in no
event shall the Series B Preferred Stock be convertible at less than the Floor Price. The holders of Series B Preferred Stock are entitled
to cumulative cash dividends at an annual rate of 15%, or $150.00 per share, based on the stated value per share. Dividends shall accrue
for as long as any shares of Series B Preferred Stock remain issued and outstanding and are payable monthly in arrears. For the first
two years, we may elect to pay the dividend amount in additional shares of Series B Preferred Stock rather than cash. The holders of the
Series B Preferred Stock are entitled to vote with the Class A common stock as a single class on an as-converted basis.
On April 1, 2025, we issued to an accredited
investor a convertible promissory note in the principal face amount of $1.65million in consideration for an advance we received
of $1.5 million. The note accrues interest at the rate of 15% per annum, unless an event of default (as defined in the note) occurs, at
which time the note would accrue interest at 18% per annum. The note will mature on September 30, 2025. The note is convertible into shares
of Class A common stock at a conversion price equal to the greater of (i) the Floor Price and (ii) the lesser of 75% of the VWAP (as defined
in the note) of the Class A common stock during the five trading days immediately prior to (A) the date of issuance of the note or (B)
the date of conversion into shares of Class A common stock.
| | 4 | | |
| | |
On April 8, 2025, we issued to an accredited
investor a convertible promissory note in the principal face amount of $110,000 in consideration for $100,000. The note accrues interest
at the rate of 15% per annum, unless an event of default (as defined in the note) occurs, at which time the note would accrue interest
at 18% per annum. The note will mature on September 30, 2025. The note is convertible into shares of Class A common stock at a conversion
price equal to the greater of (i) $0.45and (ii) the lesser of (A) 75% of the VWAP (as defined in the note) of the Class A common
stock during the five trading days immediately prior to the date of issuance of the note or (B) 75% of the lowest daily VWAP of the Class
A common stock during the five trading days immediately prior to the date of conversion into shares of Class A common stock.
**Corporate Information**
We are a Delaware corporation,
initially formed in California in 1969 and reincorporated in Delaware in 2017. We are located at 11411 Southern Highlands Parkway, Suite
190, Las Vegas, NV 89141. Our phone number is (949) 444-5464 and our website address is https://hyperscaledata.com/.
**Our Corporate Structure**
On September 10, 2024, we
changed our name from Ault Alliance, Inc. to Hyperscale Data, Inc. (the Name Change). The Name Change did not affect the
rights of our security holders. Our Class A common stock is traded on the NYSE American under the symbol GPUS. Existing
stock certificates that reflect a prior corporate name continue to be valid. Certificates reflecting the new corporate name are issued
as old stock certificates are tendered for exchange or transfer to our transfer agent.
In March and August of 2024,
we reorganized our corporate structure pursuant to a series of transactions by and among the Company and its directly and indirectly owned
subsidiaries as well as third parties. The purpose of the reorganization was to simplify our organizational and reporting structure to
more accurately reflect our business operations. As a result of the foregoing transactions, our corporate structure is currently as follows:
*
| | 5 | | |
| | |
**Our Business Strategy**
As principally a holding company,
our business strategy is designed to increase stockholder value. Under this strategy, we are focused on managing and financially supporting
our existing subsidiaries and partner companies, with the goal of pursuing monetization opportunities and maximizing the value returned
to stockholders. We have, are and will consider initiatives including, among others: public offerings, the sale of individual partner
companies, the sale of certain or all partner company interests in secondary market transactions, or a combination thereof, as well as
other opportunities to maximize stockholder value, such as activist trading. We anticipate returning value to stockholders after satisfying
our debt obligations and working capital needs.
On October 7, 2019, we created
an Executive Committee which is comprised of our Executive Chairman, Chief Executive Officer and President. The Executive Committee meets
on a daily basis to address the Companys critical needs and provides a forum to approve transactions which are communicated to
our Chief Financial Officer and Senior Vice President of Finance on a bi-weekly basis by our Chief Executive Officer.
Our Executive Committee approves
and manages our investment and trading strategy. The Executive Committee has decades of experience in financial, investing and securities
transactions. Led by our Founder and Executive Chairman, Milton C. (Todd) Ault, III, we seek to find undervalued companies and disruptive
technologies with a global impact. We use a traditional methodology for valuing securities that primarily looks for deeply depressed prices.
Upon making an investment, we often become actively involved in the companies we seek to acquire. That activity may involve a broad range
of approaches, from influencing the management of a target to take steps to improve stockholder value, to acquiring a controlling or sizable
but non-controlling interest or outright ownership of the target company in order to implement changes that we believe are required to
improve its business, and then operating and expanding that business. Mr. Ault relies heavily on William B. Horne, our Vice Chairman and
Chief Executive Officer, and Henry Nisser, our President and General Counsel, to provide analysis and guidance on all acquisition targets
and throughout the acquisition process.
From time to time, we engage
in discussions with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of
a process we initiate. To the extent we believe that a subsidiary partner companys further growth and development can best be supported
by a different ownership structure or if we otherwise believe it is in our stockholders best interests, we will seek to sell some
or all of our position in the subsidiary or partner company. These sales may take the form of privately negotiated sales of stock or assets,
mergers and acquisitions, public offerings of the subsidiary or partner companys securities and, in the case of publicly traded
partner companies, transactions in their securities in the open market. Our plans may include taking subsidiaries or partner companies
public through rights offerings, mergers or spin-offs and directed share subscription programs. We will continue to consider these and
functionally equivalent programs and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize
value for our stockholders.
Over the recent past, we have provided capital and relevant expertise
to fuel the growth of businesses in Bitcoin mining, generative AI and metaverse platform development, crane services, defense/aerospace,
industrial, automotive, medical/biopharma, consumer electronics and textiles. We have provided capital to subsidiaries as well as partner
companies in which we have an equity interest or may be actively involved, influencing development through board representation and management
support.
**Our Principal Subsidiaries and their Businesses**
The following is a brief
summary of the businesses in which we own a controlling interest, or whose financial statements we consolidated in this Annual Report:
**Sentinum**
Sentinum conducts data center
operations and Bitcoin mining through ACS.
*
*Overview*
Sentinums revenue is
currently generated primarily from mining Bitcoin for our own account. However, during 2024 we began the process of transitioning our
primary operations from Bitcoin mining to developing our Michigan data center, which
constitutes a 617,000 square foot energy-efficient facility located on a 34.5 acre site in southern Michigan (the
Michigan Facility) to support the growing demand of enterprise, HPC and AI cloud providers with high-density workloads.
| | 6 | | |
| | |
Through its wholly owned and operated data centers, Sentinums
mission is to support internal computing requirements and to empower AI-focused businesses and other businesses requiring high-density
power with reliable, scalable, and secure hosting solutions. We currently have data centers in Michigan and Montana. The Michigan
Facilitys design and available power provides Sentinum the ability to create bespoke solutions enabling it to seize growth
opportunities within the broader data center services market. The Michigan Facilitys
design continues to evolve to address prospective customer requirements, including cooling techniques such as direct to chip heat exchange
and backup power systems such as uninterruptible power supplies with batteries to store energy. Sentinum can provide a range of service
options tailored to a customers needs, including HPC and AI. HPC and AI are synonymous with applications requiring immense computational
power to process complex models and perform real-time inferences. These use cases are being adopted by a wide range of industries, such
as healthcare, energy, automotive, robotics and other autonomous systems. We are exploring the potential of working directly with end
user companies as well as companies with which we could collaborate to provide comprehensive solutions.
Sentinums attentiveness to disruptive technologies such as HPC,
AI and blockchain combined with the foundational elements of data centers, power infrastructure, telecommunications and security enable
it to support the internal operations for Bitcoin mining alongside non-mining solutions for third party customers. The economies of scale
created by Bitcoin mining operations provide a competitive advantage to Sentinum as it seeks to add non-mining applications to its services
portfolio. If successful in adding non-mining applications, it is highly likely that the Bitcoin mining operations will be gradually phased
out. Sentinum continues to evaluate opportunities to add HPC and AI applications. Sentinum conducts preliminary engineering design sessions
with prospects and provides site tours at its Michigan Facility for prospective
customers that we believe represent qualified opportunities. Sentinum continually monitors critical equipment supply chains and lead times
in support of preferred installation timelines requested by prospective customers. During April 2025, Sentinum completed the installation
requirements for deployment of a 250 kilowatts HPC customer.
Sentinum currently mines Bitcoin using purpose-built computers (or miners) to solve complex cryptographic
algorithms (or verify or solve blocks) in the blockchain in exchange for rewards and fees denominated in the
native token of that blockchain network, which is Bitcoin. Sentinums miners provide computing power to a Bitcoin mining pool operator,
in which all the participants machines mine Bitcoin as a collective group, and Sentinum gets paid the expected value of both the
block reward and transaction fees for doing so. The mining pool operator receives block rewards and transaction fees paid in Bitcoin by
the blockchain when the mining pool finds new blocks. The reward and transaction fees are then shared by the pool participants based on
their hash rate contributions to the pool, less a small amount of fees.
We have determined that Bitcoin, the only crypto asset that Sentinum
mines, would likely not be considered a security under U.S. federal securities laws, in consultation with outside counsel. We base our
analysis on relevant case law, applying the frameworks established by the U.S. Supreme Court and taking into consideration relevant guidance
by the SEC and its staff.A particular crypto assets status as a security in any relevant jurisdiction is
subject to a high degree of uncertainty and if a regulator disagrees with our characterization of Bitcoin, we may be subject to regulatory
scrutiny, investigations, fines and penalties, which may adversely affect our business, operating results and financial condition. A determination
that Bitcoin that we own or mine is a security may adversely affect the value of Bitcoin and our business.
We do not, however, currently
acquire crypto assets for investment purposes. As of December 31, 2024, we held approximately two Bitcoin valued at $183,000, based on
cost less impairment as of such date. Our mining operations generated a net loss of $12.6 million and revenue of $31.5 million during
the year ended December 31, 2024 compared to a net loss of $2.6 million and revenue of $33.1 million during the year ended December 31,
2023. As of December 31, 2024, the $183,000 carrying value of our Bitcoin represented less than 0.1% of our total assets of $219.7 million
as of such date.
*Sentinum Breakeven Analysis*
Since commencement of Sentinums
mining operations in 2021, we have received approximately 3,017 Bitcoin for providing computing power to a Bitcoin mining pool operator
and from hosted mining operations, pursuant to the terms of a Master Services Agreement (MSA) with Core Scientific, Inc.
(Core Scientific), through December 31, 2024. The MSA terminated on August 31, 2024. The Bitcoin received is available for
sale in the ordinary course of business, and while we believe that holding Bitcoin represents an attractive option to increase our liquid
assets, due to our continued operating losses we currently sell Bitcoin as it is mined to fund our operating expenses. We believe that
our integrated model with close control over our power sources and owning our Bitcoin mining data center helps us to produce Bitcoin with
attractive cost efficiency, since we are not burdened with additional costs that are typical in a third party hosting relationship such
as per miner operational fees and revenue sharing. This helps us to produce Bitcoin, excluding depreciation of our miners which is a non-cash
expense, at a cost that we believe is attractive versus the price of Bitcoin.
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| | |
Our net cost of power was
between approximately $42 to $62 per megawatt-hour in the second half of 2023 to the present. During the years ended December 31, 2024
and 2023, we had on average approximately 16,000 miners in operations. In aggregate, these miners generated approximately 677 and 1,607
Bitcoin during the years ended December 31, 2024 and 2023, respectively, for providing computing power to a Bitcoin mining pool operator
and from hosted mining operations with Core Scientific. Alternatively, during the years ended December 31, 2024 and 2023, we generated
an average of 1.85 and 4.40 Bitcoin per day, respectively, from our mining operations. Due to the termination of our hosting agreement
with Core Scientific and the block reward halving that occurred during April 2024, the average Bitcoin mined from our operations has decreased
to approximately 0.72 Bitcoin per day during the three months ended December 31, 2024. The following table reflects the actual costs that
we incurred to mine one Bitcoin.
|
| |
Year Ended December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Depreciation | |
$ | 21,354 | | |
$ | 11,256 | | |
|
Utilities and other costs | |
| 29,377 | | |
| 11,426 | | |
|
Hosting fees | |
| 17,938 | | |
| 8,586 | | |
|
| |
$ | 68,669 | | |
$ | 31,268 | | |
Additionally, Sentinums daily general and operating costs, excluding
an impairment charge of $10.5 million that was recognized and decreased the net carrying value of the Companys crypto assets mining
equipment to their estimated fair value, were approximately ($1,101) and $410, respectively, per Bitcoin mined during the years ended
December 31, 2024 and 2023. Conversely, the price of Bitcoin ranged from approximately $17,000 to approximately $44,000 during 2023 and
from approximately $38,000 to approximately $108,000 during 2024, and was approximately $79,000 as of April 7, 2025, according to Coin
Market Cap.
On February 24, 2023, BNI Montana entered into an asset purchase agreement
with TypeX, LLC to acquire two land lease agreements and two corresponding power purchase agreements in Montana. The lease and power agreements
run for a period of 10 years, with a 10-year renewal option. Sentinum is building out and developing fully operational data centers dedicated
to Bitcoin mining operations on the properties (the Montana Facilities). If we complete the initial phase of development
of the Montana Facilities, which is currently on hold, then we would expect the Montana Facilities to provide up to a combined 20 megawatts
(MWs) of power, enabling up to 6,500 S19j Pro Antminers to operate. Inclusive of costs previously incurred to acquire two
land lease agreements and two corresponding power purchase agreements, the Montana Facilities would cost approximately $7 million. Further,
given the favorable cost differential for power between Montana and Michigan, the increase in operating costs and depreciation from capitalized
expenditures is expected to approximate the power cost savings. However, while completion of the development of the Montana Facilities
would not be expected to have a negative impact on our operating results, we have currently placed this project on hold to focus on the
development of our Michigan Facility to support HPC and AI applications. During 2025, we anticipate large expenditures in our Michigan
Facility to facilitate the transition of the facility to support HPC and AI applications. Initially, these expenditures will likely increase
Sentinums losses unless we are able to pass these costs on to our future customers. These uncertainties make it impossible to predict
when, if ever, Sentinum will achieve profitable operations.
Thus, if the price of Bitcoin,
level of difficulty to mine, the amount of the block reward or the amount of Bitcoin earned by miners for mining one block on the Bitcoin
blockchain remain constant, then Sentinum will not be profitable in 2025. While we do not expect that Sentinum will achieve profitability
during 2025, the expected cash generated from our Bitcoin mining operations is still expected to exceed that of our operating costs given
the significance of depreciation charges, which is expected to account for nearly 20% of Sentinums total costs of operations during
2025.
During 2024, Sentinum reported a loss from operations of approximately
$12.6 million inclusive of depreciation and amortization of approximately $14.8 million and an impairment charge on our miners of $10.5
million. During 2023, Sentinum reported a loss from operations of approximately $2.6 million inclusive of depreciation and amortization
of approximately $18.3 million. As such, excluding capital expenditures, Sentinum generated approximately $12.7 million and $15.7 million
in cash for the years ended December 31, 2024 and 2023, respectively. The cash generated from operations was used to pay for a portion
of the costs we incurred.
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*Bitcoin and Bitcoin Mining Overview*
**
Blockchain and Bitcoin Overview
Many forms of crypto assets, including Bitcoin, are a type of digital
asset that function as a medium of exchange, a unit of account and/or a store of value (i.e. a new form of digital money). Crypto assets
operate by means of blockchain technology, which generally uses open-source, peer-to-peer software to create a decentralized digital ledger
that enables the secure use and transfer of crypto assets. We believe that Bitcoin and the associated blockchain technology has potential
advantages over traditional payment systems, including: the tamper-resistant nature of blockchain networks; rapid-to-immediate settlement
of transactions; lower fees; elimination of counterparty risk; protection from identify theft; broad accessibility; and a decentralized
nature that enhances network security by reducing the likelihood of a single point of failure. However, since centralized
exchanges, which operate intermediate processes for executing trades, storing coins and initiating transactions, account for the majority
of Bitcoin trading volume there remains the risk that a malicious actor may be able to alter blockchains on which transactions of crypto
asset reside and rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner, or at all.
Additionally, cybersecurity risks from unauthorized third parties employing illicit operations such as hacking, phishing and social engineering,
could introduce a level of counterparty risk, in other words a risk that a party is unable to fulfill its contractual obligations. Recently,
crypto assets, and Bitcoin in particular, have gained widespread mainstream attention and have begun to experience greater adoption by
both retail and institutional holders and the broader financial markets. For example, Bitcoins aggregate market value had appreciated
to $1.64 trillion in March 2025 compared to $828 billion in December 2023. All figures are derived from Coin Market Cap. As Bitcoin, and
blockchain technologies more generally, have entered the mainstream, prices of Bitcoin have reached all-time highs, albeit with periodic
price decreases, and the broader ecosystem has continued to develop. While we expect the value of Bitcoin to remain volatile, we believe
this increase in its aggregate market value signals institutionalization of Bitcoin and wider adoption of crypto asset. For example, in
January 2024, the SEC approved the listing and trading of Bitcoin exchange-traded funds, of which, as of April 8, 2025, approximately
34 are trading with over $167 billion of Bitcoin assets held (https://etfdb.com/themes/bitcoin-etfs/#complete-list&sort_name=assets_under_management&sort_order=desc&page=1).
**
Bitcoin is a decentralized
asset that enables near instantaneous transfers. Transactions occur via an open-source, cryptographic protocol platform which uses peer-to-peer
technology to operate with no central authority. The online network hosts the public transaction ledger, known as the blockchain, and
each crypto asset is associated with a source code that comprises the basis for the cryptographic and algorithmic protocols governing
the blockchain. In a crypto asset network, every peer has its own copy of the blockchain, which contains records of every historical transaction
effectively containing records of all account balances. Each account is identified solely by its unique public key (making it
effectively anonymous) and is secured with its associated private key (kept secret, like a password). The combination of private and public
cryptographic keys constitutes a secure digital identity in the form of a digital signature, providing strong control of ownership.
No single entity owns or operates
the network. The infrastructure is collectively maintained by a decentralized public user base. As the network is decentralized, it does
not rely on either governmental authorities or financial institutions to create, transmit or determine the value of the currency units.
Rather, the value is determined by market factors, supply and demand for the units, the prices being set in transfers by mutual agreement
or barter among transacting parties, as well as the number of merchants that may accept the crypto asset. Since transfers do not require
involvement of intermediaries or third parties, there are only nominal transaction costs in direct peer-to-peer transactions. For example:
|
|
|
In terms of conventional peer-to-peer transactions, there either are no fees or they are de minimis (Source: https://www.kraken.com/en-us); | |
|
|
|
For purposes of traditional networks, there are nominal fees associated with any transaction (Source: https://bitinfocharts.com/bitcoin); and | |
|
|
|
As of April 8, 2025, the 90-day simple average Bitcoin network transaction fee is $1.71 per transaction, which is still low compared to conventional transaction fees charged by banks and other more traditional financial institutions (https://bitinfocharts.com/bitcoin). | |
The network fee is separate
and distinct from the pool fee we pay Luxor Technology (Luxor) for its services in acting as a pool operator, discussed
below. The network fee is applicable to anyone who transacts on the blockchain.
Given that block space is
limited, mining fees can and often do fluctuate significantly from transaction to transaction as a result of congestion.
However, this congestion does not negate any of the statements made immediately above.
Units of Bitcoin can be converted
to fiat currencies, such as the U.S. dollar, at rates determined on various exchanges, such as Binance, Coinbase, Bybit, Kraken, Gemini
and others. Bitcoin prices are quoted on various exchanges and fluctuate with extreme volatility.
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| | |
We believe that Bitcoin, the only crypto asset we provide computing
power to a mining pool operator for mining purposes, offers many advantages over traditional, fiat currencies, though many of these factors
also present potential disadvantages and may introduce additional risks, including:
|
| Acting as a fraud deterrent, as crypto assets
are digital and cannot be counterfeited or reversed arbitrarily by a sender; | |
|
| Immediate settlement; | |
|
| Elimination of counterparty risk; | |
|
| No trusted intermediary required; | |
|
| Lower fees; | |
|
| Identity theft prevention; | |
|
| Widespread accessibility; | |
|
| Transactions are verified and protected through
a confirmation process, which prevents the problem of double spending; | |
|
| Decentralized no central authority (government
or financial institution); and | |
|
| Not recognized universally and not bound by government imposed or market
exchange rates. | |
However, crypto assets may
not provide all of the benefits they purport to offer.
Limitations on Bitcoin Mining
In addition to competition, there are two principal factors that may
affect Bitcoin mining companies: (i) limitations on the supply of Bitcoin; and (ii) the market price of Bitcoin.
The blockchains method for creating new Bitcoins is mathematically
determined in a manner such that the supply of Bitcoins grows at a limited rate pursuant to a pre-set schedule. Specifically, the number
of Bitcoins awarded for solving a new block is automatically halved for every 210,000 blocks that are solved. The current fixed reward
for solving a new block is 3.125 Bitcoins per block, which was reduced from 6.25 Bitcoins in April 2024 and will be reduced further to
1.5625 Bitcoins per block in approximately March 2028. This deliberately controlled rate of Bitcoin creation means that the number of
Bitcoins in existence will never exceed 21 million and that Bitcoin cannot be devalued through excessive production unless the Bitcoin
networks source code and the underlying protocol for Bitcoin issuance is altered. This also means, however, that our revenue prospects
will decline unless the price of a Bitcoin increases commensurately or we acquire more miners, which we do not intend to do.
We only participate in mining
pools that mine Bitcoin. Our ability to generate revenue from these mining operations will be dependent on the price of Bitcoin. The price
of Bitcoin has experienced substantial volatility, including fluctuation patterns which may reflect bubble type volatility,
meaning that high or low prices at a given time may not be indicative of the current or future value of Bitcoin. The price of a Bitcoin
may be subject to rapidly changing investor and market sentiment, and may be influenced by factors such as technology, regulatory developments
and media coverage. Further, Bitcoins value may be based on various factors, including their acceptance as a means of exchange
or purchasing power by consumers and vendors, volume, liquidity and transferability and market demand. Bitcoins current price reflects,
in part, the belief by some that Bitcoin could become a widely accepted form of currency; however, if this prediction turns out to be
incorrect its price could decrease dramatically, as would our prospects for future revenue and profits. See Risk Factors
Risks Related to Our Bitcoin Operations for more information on the risks we face due to our mining of Bitcoin and its speculative
and volatile nature.
| | 10 | | |
| | |
Bitcoin Mining and Mining Pools
As a participant in a Bitcoin mining pool, we use specialized miners
to solve cryptographic math problems necessary to record and publish crypto asset transactions to blockchain ledgers. Generally,
each crypto asset has its own blockchain, which consists of software code (also known as a protocol), which is run by all the computers
on the network for such blockchain. Within this code, transactions are collated into blocks, and these blocks must meet certain requirements
to be verified by the blockchain software, added to the blockchain or ledger of all transactions and published to all participants on
the network that are running the blockchain software. After a transaction is verified, it is combined with other transactions to create
a new block of data for the blockchain. For proof-of-work blockchains, the process of verifying valid blocks requires computational effort
to solve a cryptographic equation, and this computational effort protects the integrity of the blockchain ledger. This process is referred
to as mining. As a reward for verifying a new block, miners receive payment in the form of the native crypto asset of the
network, in our case Bitcoin. This payment is comprised of a block reward (i.e., the automatic issuance of new Bitcoin) and the aggregated
transaction fees for the transactions included in the block (paid in existing crypto asset tokens by the participants to the transactions).
The block reward payments and the aggregated transaction fees provide the incentive for miners to contribute hash rate to the network.
A hash is the
actual cryptographic function run by the miners, and is a unique set of numbers and letters derived from the content of the block. The
protocol governing the relevant blockchain sets certain requirements for the hash. Miners compete to be the first to generate a valid
hash meeting these requirements and, thereby, secure payment for solving the block. Hash rate is the speed at which miners can complete
the calculation, and therefore is a critical measure of performance and computational power. A high rate means a miner may complete more
calculations over a given period and has a greater chance to solve a block. An individual miner has a hash rate total of its miners seeking
to mine a specific crypto asset, and the blockchain-wide hash rate for a specific crypto asset, in our case Bitcoin, can be understood
as the aggregate of the hash rates of all of the miners actively trying to solve a block on that blockchain at a given time.
The protocols governing Bitcoin
are coded to regulate the frequency at which new blocks are verified by automatically adjusting what is known as the mining difficulty,
which is the level of computational activity required before a new block is solved and verified. For example, on the Bitcoin blockchain
the protocol is coded such that a new block is solved and verified approximately every ten minutes. As such, to the extent the hash power
on the network is increased or decreased due to, for example, fluctuations in the number of active miners online, mining difficulty is
correspondingly increased or decreased to maintain the preset interval for the verification of new blocks.
On Bitcoin networks, the rewards
for solving a block are also subject to periodic incremental halving. Halving is a process designed to control the overall supply and
reduce the risk of inflation in Bitcoin using a proof-of-work consensus algorithm. After a predetermined number of blocks are added to
the blockchain, the mining reward is cut in half, hence the term halving. The last halving for Bitcoin occurred on April
20, 2024. Transaction fees are variable and depend on the level of activity on the network. Generally, transaction fees increase during
times of network congestion, as miners will prefer transactions with higher fees, and therefore a higher fee can reduce the time to process
a transaction, and decrease when there are fewer transactions on the network.
As the total amount of available
hash rate has increased on the Bitcoin network, it has become increasingly difficult for any individual miner to independently solve a
block and as a result mining pools have emerged as an efficient way for miners to pool resources. Mining pools aggregate
the hash rate of various miners participating in the mining pool. In this way the mining pool operator, rather than an individual miner,
validates the block and receives the block reward and related transaction fees. The mining pool is organized by a third party, in our
case, Luxor. All of the approximately 9,500 miners currently in operation at our Michigan facility provide hash rate to the Luxor mining
pool. In consideration for receiving a percentage of the earned block rewards and transaction fees, Luxor administers the pool and ensures
that the participants in the pool receive their share of the block reward and related transaction fees, generally pro-rata to their contributed
hash rate. Mining pools offer miners more predictable and consistent revenue compared to mining individually. We participate in mining
pools by providing what the industry refers to as hashrate to the pool. Hashrate is defined as the computing power that
our mining equipment produces when helping to validate a block that the mining pool is trying to solve. We use the FPPS, or Full Pay-Per-Share,
method when mining with Luxor. Pursuant to the Full Pay-Per-Share model, both the block reward and the mining service charge
are settled according to the theoretical profit. It includes the calculation of a standard transaction fee within a certain period and
distributes it to mining pool participants according to their hash power contributions in the pool. It increases the mining pool participants
earnings by sharing transaction fees. Standard transaction fees are calculated using a certain period which are then distributed to miners
according to their hash power contributions in the pool. Luxor currently charges us a 0.68% mining fee.
We provide computing power to the mining pool, which is run by the
mining pool operator with which we contract, which in turn provides transaction verification services. Based on the terms of the agreement,
in our judgment, the mining pool operator is considered the principal in providing mining pool services. We recognize revenue, net of
certain transaction fees from the mining pool operator, which are not considered material. Our current mining pool agreement is cancelable
at any time by either party without penalty. Revenue received for providing computing power would be directly impacted positively or negatively
should we start and stop providing computing power to the mining pool operator within a given reporting period.
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*Our Strategy*
Own and Operate Our Mining Facilities
We have in the past invested
heavily in purchasing, building and operating our mining facilities, though we have no intention of acquiring more miners. By owning and
operating our miners at facilities that offer competitive advantages, including access to reliable, low-cost, renewable power, we expect
to have greater control over the timing of the deployment of our miners. We also may enhance our ability to intelligently and quickly
adapt our operating model and reap savings compared to paying for outsourced operations and infrastructure.
Reliable, Low-Cost, Renewable Power
Power represents our highest
variable direct cost for our mining operations, with electrical power required to operate the miners. We believe the combination of increased
mining difficulty, driven by greater hash rates, and the periodic adjustment of reward rates, such as the halving of Bitcoin rewards,
will drive the increasing importance of power efficiency in Bitcoin mining over the long term. As a result, we are focused on deploying
our miners at locations with access to reliable, renewable power sources, as successfully doing so should enable us to reduce our power
costs.
Miners require considerable amounts of electrical energy to perform
their functions and mine Bitcoin; consequently, a critical aspect of operating in the crypto asset mining industry is obtaining a reliable
supply of electricity at a relatively low and stable cost. To this end, in January 2021, ACS purchased the Michigan Facility. Since the
purchase of the Michigan Facility, we have invested in infrastructure improvements and began both ramping up the power capacity and installing
miners. To date, we have increased the power load from 1.5 MWs to approximately 30 MWs. ACS recently announced that it has reached an
agreement in principle with the local utility expected to energize the Michigan Facility, enabling ACS to increase its power capacity
from approximately 30 MW**s**to 300 MWs. The completion of the power upgrade is anticipated to take 44 months from execution
of a formal letter of authorization between ACS and the utility, which is currently being negotiated. In addition, ACS has reached an
agreement in principle with the local natural gas utility to provide the capability to energize the Michigan Facility with an additional
40 MWs. The project is expected to be completed within 18 months of the execution of definitive agreements. Combined, this would enable
ACS to increase its power capacity from approximately 30 MW to approximately 340 MW. Currently, we have approximately 4,900 S19j Pro Antminers
and approximately 4,600 S19 XP Antminers in operation at our Michigan Facility but it is our intention to dedicate all the power capacity
at the Michigan Facility to our AI hyperscale data center operations. If successful, we expect to sell any idle miners in the secondary
market, which could be between 12,500 and 16,500 miners.
We have also invested in a data center through BNI Montana. We have
completed the build-out at one of the two sites at the Montana Facilities, which provides up to 10 MWs of power. If we complete the build-out
of the second site, which is currently on hold pending the transition of our Michigan Facility to support HPC and AI applications, the
Montana Facilities will provide up to a combined 20 MWs of power and allow us to operate approximately 6,500 miners. We believe that the
capacity of the Montana Facilities can be significantly expanded, and we have begun an electrical load study in collaboration with the
local utility to explore potential power upgrades. However, given the current price of Bitcoin and the level of difficulty to mine, at
this time we have no plans to expand the capacity at the Montana Facilities, which has the capacity to operate approximately 2,600 S19j
Pro Antminers. At this time, we have ceased mining at the Montana Facilities and will not resume mining there until the price of Bitcoin
and the level of difficulty to mine improves such that our existing miners can operate profitably.
We continue to evaluate other sites, locations, and partnerships for
additional and alternative support of future mining operations. While we have not at present entered into any other agreements, we continue
to explore and evaluate additional facilities that would enable us to expand our mining operations as needed.
Our Bitcoin Mining Operations
Currently, we have approximately 4,900 S19j Pro Antminers and approximately
4,600 S19 XP Antminers in operation at our Michigan Facility and no Antminers in operation at our Montana facility. Additionally, approximately
9,700 S19j Pro Antminers are not in operation, primarily because of the termination of our hosting agreement with Core Scientific on August
31, 2024. Antminers in operation have an aggregate mining production capacity of approximately 1.13 exahashes per second.
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Our strategy includes identifying clean power for our Bitcoin mining
operations. Management has considered the issues surrounding the environmental impact of our Bitcoin mining operations and concluded that
the environmental impact of our mining operations is not material. The basis for this conclusion was that Indiana Michigan Power, the
regulated utility that provides power to our Michigan Facility, reported that in 2023 it generated more than 87% of its energy from emission-free
sources, including solar, wind, hydro and nuclear. The power source for our Montana Facilities, Basin Electric Power Cooperative, reported
that approximately 28% of its power was from emission-free sources, primarily wind and hydro. Since we are only mining Bitcoin at our
Michigan Facility, approximately 87% of our mining operations are being generated from emission-free sources. If we resume operations
at our Montana Facilities, more than 75% of power used in our mining operations would be generated from emission-free sources. In addition
to our continued expansion investments at the Michigan Facility, we also seek out new locations to support our bitcoin mining business.
We consider sites with a variety of offerings, including purchasing the site (as we have done in Michigan), but also leasing buildings
and facilities (as we have done with the Montana Facilities), hosting relationships and strategic partnerships. At this time, we have
not entered into any new mining agreements at locations other than the Michigan Facility and the Montana Facilities. We mine Bitcoin only.
Coins that are mined are held
in a custodial account. We securely store our Bitcoin at Gemini Trust Company, LLC (Gemini), a regulated, audited and insured
crypto asset custodian. Gemini is a fiduciary and qualified custodian under the New York Banking Law and is licensed by the New York State
Department of Financial Services. Additionally, Gemini holds numerous money transmitter licenses or the statutory equivalent and has obtained
System and Organization Controls (SOC) 1 Type 2 and SOC 2 Type 2 certifications from its independent third-party auditor,
Deloitte and Touche LLP. A SOC 1 report evaluates controls that are applicable to internal control over financial reporting whereas a
SOC 2 report evaluates a security framework that authenticates an organizations ability to securely handle customer data. Further,
Gemini has insurance coverage against the theft of crypto assets that results from a direct security breach or hack of Geminis
systems, or theft by a Gemini employee.
The custody arrangements require
that we mine to a custodial wallet address where the private key is held by the custodian and all keys for the wallet are held in cold
storage. This provides a layer of protection in both the transaction and liquidation phases of the operations by using multi-factor and
multi-person approval processes, to include know your customer and anti-money laundering (AML) procedures of the receiving
party. We will either hold the Bitcoin or may choose to convert those assets into fiat currency depending on financial needs and plans.
When we opt to convert the Bitcoins we sell or exchange our Bitcoin through Gemini, the custodian of our digital wallet. When we elect
to make a sale or exchange our Senior Vice President - Finance submits a request to Geminis execution department to exchange Bitcoin
for U.S. dollars. Gemini sends an approval email to both our CEO and CFO to approve. Once approved by either our CEO or CFO, Gemini executes
the sale/exchange on its trading platform at current market prices, less commissions, and deposits the U.S. dollars into our bank account.
Beyond the foregoing, our
custody agreement with Gemini provides that:
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Gemini provides a unique custody account in which all our blockchain assets are held, which are segregated from all others assets and are verifiable through the blockchain; and | |
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Gemini charges us fees in Bitcoin, which is deducted from our digital
assets on the last business day of every month. | |
Currently, we are converting Bitcoin received from our mining activities
into fiat currency on a nearly daily basis to pay operating costs and purchase commitments for expansion activities at our facilities.
We do not hold any Bitcoin for investment.
Regulation
The laws and regulations applicable
to crypto asset are evolving and subject to interpretation and change. Governments around the world have reacted differently to crypto
assets; certain governments have deemed them illegal, and others have allowed their use and trade without restriction, while in some jurisdictions,
such as in the United States, many crypto assets are subject to extensive, and in some cases overlapping, unclear and evolving regulatory
requirements, which generally does not apply to Bitcoin. As crypto assets have grown in both popularity and market value, the U.S. Congress
and a number of U.S. federal and state agencies, including the Financial Crimes Enforcement Network (FinCEN), the SEC, the
Commodity Futures Trading Commission (CFTC), Financial Industry Regulatory Authority (FINRA), the Consumer
Financial Protection Bureau, the Department of Justice (DOJ), the Department of Homeland Security, the Federal Bureau of
Investigation (FBI), the Internal Revenue Service (IRS) and state financial regulators, have been examining
the operations of crypto asset networks, crypto asset users and crypto asset exchange markets, with particular focus on the extent to
which crypto assets can be used to launder the proceeds of illegal activities or fund criminal or terrorist enterprises and the safety
and soundness and consumer-protective safeguards of exchanges or other service-providers that hold, transfer, trade or exchange crypto
assets for users.
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Many of these state and federal agencies have issued consumer advisories
regarding the risks posed by crypto assets to investors. In addition, federal and state agencies, and other countries have issued rules
or guidance about the treatment of crypto asset transactions or requirements for businesses engaged in activities related to crypto assets.
Depending on the regulatory characterization of the Bitcoin we mine, the markets for Bitcoin in general, and our activities in particular,
may be subject to one or more regulators in the United States and globally. Ongoing and future regulatory actions may alter, perhaps to
a materially adverse extent, the nature of crypto asset markets and our crypto asset operations. Additionally, U.S. state and federal,
and foreign regulators and legislatures have taken action against crypto asset businesses or enacted restrictive regimes in response to
adverse publicity arising from hacks, consumer harm, or criminal activity stemming from crypto asset activity. There is also increasing
attention being paid by U.S. federal and state energy regulatory authorities as the total load of crypto mining grows and potentially
alters the supply and dispatch functionality of the wholesale grid and retail distribution systems. Many state legislative bodies are
also actively reviewing the impact of crypto mining in their respective states. For example, in May 2023, Montana enacted S.B. 178 which
established a right-to-mine for digital assets and prevents local governments from enacting any ordinance, resolution, or rule that selectively
targets digital asset miners. In 2022, Michigan considered a bill that would establish a blockchain and cryptocurrency commission aimed
at, among other things, examining the feasibility of regulating the energy consumption associated with the cryptocurrency industry and
investigate blockchain and cryptocurrency. The bill has, as of the date of this Annual Report, yet to be signed into law. In addition
to Michigan and Montana, other states are also considering or have enacted laws aimed at regulating crypto mining. For example, in 2022,
New York placed a two-year moratorium on certain cryptocurrency mining companies that use fossil fuels, which expired in November 2024.
Environmental
The perceived threat of climate change continues to attract considerable
attention in the United States and around the world. Numerous proposals have been made and could continue to be made at the international,
national, regional and state levels of government to monitor and limit emissions of greenhouse gases (GHGs). These efforts
have included consideration of cap-and-trade programs, carbon taxes, GHG disclosure obligations and regulations that directly limit GHG
emissions from certain sources. In addition, President Biden identified addressing climate change and the energy transition as priorities
under his Administration. He has issued executive orders and regulatory directives related to climate change, and has recommitted the
United States to long-term international goals to reduce emissions. In recent years, the U.S. Congress has considered legislation to reduce
emissions of GHGs and has included climate change considerations in its funding bills. For example, the Inflation Reduction Act of 2022,
which appropriates significant federal funding for renewable energy initiatives, was signed into law in August 2022 and could accelerate
the transition away from fossil fuels. These laws, initiatives, and associated regulations or other national or regional commitments to
reduce GHG emissions could adversely affect fossil fuel consumption, require the installation of emissions control technologies, and increase
the expense associated with the purchase of emissions reduction credits or allowances to comply with current or future emissions reduction
programs. It is uncertain how many of the Biden Administrations initiatives will continue to remain in force under the Trump Administration.
At
the federal level, the Environmental Protection Agency (EPA) has also adopted rules that, among other things, establish
construction and operating permit reviews, emissions control standards, and monitoring and annual reporting for GHG emissions from certain
large stationary sources. In November 2021, the Biden Administration released The Long-Term Strategy of the United States: Pathways
to Net-Zero Greenhouse Gas Emissions by 2050, which establishes a roadmap to net zero emissions in the United States by 2050 through,
among other things, improving energy efficiency, decarbonizing energy sources via electricity, hydrogen and sustainable biofuels, eliminating
subsidies provided to the fossil fuel industry, reducing non-CO2 GHG emissions and increasing the emphasis on climate-related
risks across government agencies and economic sectors. Additionally, from time to time the EPA has proposed, revised, and adopted rules
establishing new source performance standards for certain pollutants from coal-fueled electric generating plants.
We note that the implementation of the rule depends, in part, on the
widespread development, adoption, and availability of carbon capture and storage technology and solutions, which may not be certain at
this time. We also note that this proposed rule is subject to intense political debate and its adoption or implementation were impacted
by the results of the 2024 election cycle, though the extent of any changes to the prior regulatory regime remain undetermined. While
no final rule has been published to date, this proposed rule and any other new agency action or rulemaking that applies to our facilities
could increase our compliance costs or otherwise materially restrict our operations. Currently, it is unclear how future legislation and
regulation will affect our Bitcoin mining operations. The course of future legislation and regulation in the United States remains difficult
to predict, and potential increased costs associated with new legislation or regulation cannot be predicted at this time.
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Competition
Our business environment is constantly evolving, and cryptocurrency
miners can range from individual enthusiasts to professional mining operations with dedicated data centers. We compete with other companies
that focus all or a portion of their activities on cryptocurrency mining activities at scale. We face significant competition in every
aspect of our business, including, but not limited to, the ability to raise capital, obtaining the lowest cost of electricity, obtaining
access to energy sites with reliable sources of power, and evaluating new technology developments in the industry.
At present, the information
concerning the activities of these enterprises may not be readily available as the vast majority of the participants in this sector do
not publish information publicly or the information may be unreliable. Published sources of information include bitcoin.org
and blockchain.info; however, the reliability of that information and its continued availability cannot be assured and the
contents of these sites are not incorporated into this Annual Report.
A number of public companies
(traded in the U.S. and internationally) and private companies may be considered to compete with us, including the following companies:
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| Argo Blockchain PLC; | |
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| Bit Digital, Inc.; | |
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| Bitdeer Technologies Group; | |
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| Bitfarms Technologies Ltd.; | |
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| Cipher Mining Inc.; | |
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| CleanSpark, Inc.; | |
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| Core Scientific, Inc.; | |
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| Digi Power X Inc.; | |
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| Galaxy Digital Holdings Ltd.; | |
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| Hive Blockchain Technologies Inc.; | |
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| Hut 8 Mining Corp.; | |
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| IREN Limited; | |
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| Marathon Digital Holdings, Inc.; | |
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| Northern Data AG; | |
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| Riot Blockchain, Inc.; | |
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| Stronghold Digital Mining, Inc.; and | |
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| TeraWulf Inc. | |
Intellectual Property
We do not currently own, and
do not have any current plans to seek, any patents in connection with our existing and planned blockchain and cryptocurrency related operations.
We do expect to rely upon trade secrets, trademarks, service marks, trade names, copyrights and other intellectual property rights and
expect to license the use of intellectual property rights owned and controlled by others.
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Blockchain Background
Blockchain technology first came to public attention in 2008 as the
database technology that underpins Bitcoin, the worlds first cryptocurrency. Blockchains are generally open-source, peer-to-peer
software programs that act as decentralized digital ledgers, each comprising a series of data blocks that are linked and
secured using cryptography in a chain. The blockchain program consists of a software protocol with several functions. The
software protocol is run by multiple computer systems or nodes. For many blockchain networks, each node has its own copy
of the blockchain ledger, which contains a historical record of every transaction. The digital ledger continuously grows as new blocks
are added to it to record the most recent transactions in a linear, chronological order. The same information is stored across a network
of computers all over the world, and this record makes it possible to track the ownership and transfer of cryptocurrency from the creation
of the blockchain to its current state, and effectively records of all account balances (as one can identify what account holds what value
through the decentralized ledger).
We do not operate a complete
node; rather, as noted above under the heading Bitcoin Mining and Mining Pools, we provide computing power to a pool operator.
The blockchain protocol allows
users to submit transactions to the network for confirmation. However, a transaction will not be accepted by the protocol if the inputs
to the transaction have previously been used in another transaction. This prevention of double spending is a key security
feature of blockchain networks.
Another key function of the
blockchain that protects the integrity of the network is the hashing process, which acts as a tamper-evident seal that confirms the validity
of the new block and all earlier blocks. Hashing is the process of a block being posted to the network. Hashing results from miners, who
are responsible for receiving broadcast transactions, processing those transactions into new blocks and updating the blockchain with the
new blocks through hashing. The hashing process ties every new block to the existing block on the blockchain to ensure each is a continuous
record of verified transactions.
The hashing algorithm on a
proof-of-work blockchain network is a mathematical transformation function with two key properties. The first important function of hashing
is that the algorithm accepts any alphanumeric dataset as an input and produces a unique output code. The smallest change in the dataset
results in a significant change in the unique code. Any tampering of the dataset can be detected by re-hashing the data and checking for
a change in the unique code. Any user that runs the hash algorithm on the same data will derive the same unique code. Consequently, the
data on the distributed ledger can be run through a series of hash algorithms to create a unique code, which would reveal if any changes
to the ledger have been made.
Second, whenever a new set
or block of transactions is added to the ledger, it is appended with the code from the prior state of the ledger before
it is hashed. Thus, the hash created from the new block will incorporate the hash from the previous block. An alteration made to an earlier
block would make the hashes of all subsequent blocks invalid, as the discrepancy would be easily detected by future miners through the
protocols governing the blockchain. If a hacker were to attempt to make a change to an earlier block and broadcast it along with following
blocks to the other nodes on the network, that broadcast would be discarded in favor of one from a different node which complied with
the requirements of the protocol.
Thus, in addition to creating new blocks, miners vote
with their computer power, expressing their acceptance of valid blocks by working on adding them to the blockchain, and rejecting invalid
blocks by refusing to work on them. If a miners proposed block is added to the blockchain by a majority of the nodes on the network,
it is considered part of the blockchain. The nodes on the network synchronize with each other to ensure that once a block is accepted
by the majority, the new block will eventually be added to all the nodes. Consequently, the historical state of the ledger can be changed
if control of more than 50% of the network is obtained; however, in the case of widely held cryptocurrencies with non-trivial valuations,
it may be economically prohibitive for any actor or group of actors acting in concert to obtain computing power that consists of more
than 50% of the network.
Unlike proof-of-work networks,
in which miners expend computational resources to compete to validate transactions and are rewarded cryptocurrency in proportion to the
amount of computational resources expended, in a proof-of-stake network, miners (sometimes called validators) risk or stake
assets to compete to be randomly selected to validate transactions and are rewarded cryptocurrency in proportion to the amount of assets
staked. Any malicious activity, such as mining multiple blocks, disagreeing with the eventual consensus or otherwise violating protocol
rules, results in the forfeiture or slashing of a portion of the staked assets. Proof-of-stake is viewed by some as more
energy efficient and scalable than proof-of-work.
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Blockchain technology enables
the secure use and transfer of digital assets. Digital asset is a broad term that encompasses additional applications, including
ownership, transaction tracking, identity management, and smart contracts. A digital asset can represent physical or virtual assets, a
value, or a use right/service (e.g., computer storage space).
Whereas digital assets can
take many forms and be used for a variety of functions, cryptocurrencies are a type of digital asset that primarily function as a medium
of exchange, a unit of account, and/or a store of value. Cryptocurrencies allow anyone who holds a compatible wallet, anywhere in the
world, to hold and transfer that cryptocurrency without the need for an intermediary or trusted third party. Units of a cryptocurrency
may exist only as data on the internet, and often are not issued or controlled by any single institution, authority or government. Whereas
most of the worlds money currently exists in the form of electronic records managed by central authorities such as banks, units
of a non-government cryptocurrency exist as electronic records in a decentralized blockchain database. Because cryptocurrencies have no
inherent intrinsic value, the value of cryptocurrencies is determined by the value that various market participants place on them through
their transactions. Bitcoin, Ethereum and other cryptocurrencies have historically exhibited high price volatility relative to more traditional
asset classes.
Private entities also issue digital assets called stablecoins
whose prices are pegged to those of an underlying fiat currency, a commodity or other financial instrument or other physical asset and
are therefore less susceptible to volatility. Stablecoins can be backed by fiat money, physical assets, or other crypto assets. Government
institutions are also reportedly testing and considering issuing Central Bank Digital Currencies (CBDCs). While stablecoins
or CBDCs may exhibit less price volatility than other cryptocurrencies, both rely on a central authority to establish the value
of the asset, and therefore represent an exception to the general discussion of the design of cryptocurrencies in this Annual Report.
Each cryptocurrency has a
source code that comprises the basis for the cryptographic and algorithmic protocols, which govern the blockchain. The source code is
commonly open-source and therefore can be inspected by anyone, and is maintained on an ongoing basis through contributors proposing amendments
to the protocol, which are peer reviewed and adopted by consensus among participants on the blockchain network. These protocols govern
the functioning of the network, including the ownership and transfer of the cryptocurrency, and are executed on the decentralized peer-to-peer
blockchain infrastructure. The peer-to-peer infrastructure on which a blockchain operates is not owned or operated by a single entity.
Instead, the infrastructure is collectively maintained by a decentralized user base. Each peer user is generally known as a node
or miner, and each miner processes transactions on the network in accordance with the protocols of the relevant cryptocurrency.
As a result, these cryptocurrencies
do not rely on either governmental authorities or financial institutions to create, transmit or determine the value ofunits of cryptocurrency.
Rather:
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the creation ofunits of cryptocurrency generally is governed by the source code, not a central entity; | |
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the transmission of a cryptocurrency is governed by the source code and processed by the decentralized peer-to-peer network of nodes or miners; and | |
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the value of a cryptocurrency is generally determined by the market supply of and demand for the cryptocurrency, with prices set in transfers by mutual agreement or barter, as well as through acceptance directly by merchants in exchange for goods and services. | |
Cryptocurrencies may be open-source
projects with no official developer or group of developers that control the network. However, certain networks development may
be overseen informally by a core group of developers that may propose quasi-official releases of updates and other changes to the networks
source code. The release of updates to a blockchain networks source code does not guarantee that the updates will be automatically
adopted. Users and miners must accept any changes made to the source code by downloading the proposed modification of the networks
source code. A modification of the networks source code is effective only with respect to the users and miners that download it.
If a modification is accepted by only apercentage of users and miners, a division in the network will occur such that one network
will run the pre-modification source code and the other network will run the modified source code. Such a division is known as a fork.
Consequently, a modification to the source code becomes part of a blockchain network only if accepted by participants collectively having
most of the processing power on the network.
Each account
on a blockchain network is identified by its unique public key, and is secured with its associated private key (which the account holder
must keep secret, like a password). Cryptocurrencies are treated as bearer assets, because possession of the private key generally determines
who controls or owns a cryptocurrency. Protecting private keys from unwarranted access and theft is critically important, as once the
private key is taken, in most circumstances, control over the related cryptocurrency is gone. The combination of private and public cryptographic
keys constitutes a secure digital identity in the form of a digital signature. As long as the private key is kept private (i.e., confidential
to the owner of the account) it provides strong control of ownership.
****
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**Ault Lending**
Ault Lending provides commercial loans to companies throughout the
U.S. to provide them with operating capital to finance the growth of their businesses. The loans range in duration from six months to
three years. Ault Lendings loans are made or arranged pursuant to a California Financing Law license (Lic.no. 60 DBO77905).
Ault
Lending acquires controlling or non-controlling interests in and actively manages businesses that we generally believe (i) are undervalued
and have disruptive technologies with a global impact, (ii)operate in industries with long-term macroeconomic growth opportunities,
(iii)have the potential for positive and stable cash flows, (iv)face minimal threats of technological or competitive obsolescence,
and (v)have strong management teams largely in place. We offer investors a unique opportunity to own a diverse group of leading
middle-market businesses in the niche-industrial and branded-consumer sectors.
Ault Lending uses a traditional methodology for valuing securities
that primarily looks for deeply depressed prices. Upon making an investment, we often become actively involved in the companies we seek
to acquire, whether in its entirety or merely a controlling or non-controlling interest. That activity may involve a broad range of approaches,
from influencing the management of a target to take steps to improve stockholder value, to acquiring a controlling or non-controlling
interest or outright ownership of the target company in order to implement changes that we believe are required to improve its business,
and then operating and expanding that business.
Ault
Lending believes that private company operators and corporate parents looking to sell their business units may consider us an attractive
purchaser because of our ability to:
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provide ongoing strategic and financial support
for their businesses, including professionalization of our subsidiaries at scale; | |
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maintain a long-term outlook as to the ownership
of those businesses; | |
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sustainably invest in growth capital and/or add-on
acquisitions where appropriate; and | |
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consummate transactions efficiently without being dependent on third-party transaction financing. | |
In particular, we believe that our outlook on length of ownership and
active management on our part may alleviate the concern that many private company operators and parent companies may have with regard
to their businesses going through multiple sale processes in a short period of time. We believe this outlook enhances our ability to develop
a comprehensive strategy to increase the earnings and cash flows of each of our businesses.
Finally, it has been our experience that our ability to acquire businesses
without the cumbersome delays and conditions typical of third-party transactional financing is appealing to sellers of businesses who
are interested in confidentiality, speed and certainty to close.
We
believe our management teams strong relationships with industry executives, accountants, attorneys, business brokers, commercial
and investment bankers, and other potential sources of acquisition opportunities offer us substantial opportunities to assess small businesses
available for acquisition. In addition, the flexibility, creativity, experience and expertise of our management team in structuring transactions
allows us to consider non-traditional and complex transactions tailored to fit a specific acquisition target.
In
terms of the businesses in which we have a controlling interest as of December 31, 2024, we believe that these businesses have stable
management teams, operate in strong markets with defensible market niches, and maintain long-standing customer relationships.
Ault Lending provides funding
to businesses through loans and investments. Ault Lending offers a variety of loan types including commercial loans, convertible notes
and revolving lines of credit. Ault Lending is engaged in providing commercial loans to companies throughout the United States to provide
them with operating capital to finance the growth of their businesses. The loans are primarily short-term, ranging from six to 12 months,
but may be of longer duration. These terms are subject to change as market needs dictate, and Ault Lending anticipates offering additional
products in the future.
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Ault Lending uses its considerable financial experience, data analytics,
and a credit scoring model to assess the creditworthiness of each small business borrower applicant. If the business meets Ault Lendings
criteria, Ault Lending sets the initial interest rate according to its credit and financial models. The final interest rate offered to
the borrower will be determined by Ault Lendings interpretation of the marketplace. In order to borrow from Ault Lending, borrowers
must display characteristics indicative of durable business and financial situations. These include factors such as revenue, time in business,
number of employees, and financial and credit variables. In order to qualify, business borrower applicants must be approved through Ault
Lendings underwriting process, which analyzes credit and financial data of both the business and the business owner. Ault Lending
takes into account several business factors (including revenue, age of business, cash flows, and other variables). The underwriting process
determines the loan amount to approve, how loans will be priced, and whether to include a blanket lien, as well as additional factors
(including length of loan, estimated default rates by type and grade, and general economic environment).
Our Executive Committee, which is comprised of our Executive Chairman,
Chief Executive Officer and President, acts as the underwriting committee for Ault Lending and must approve all lending transactions.
The Executive Committee has decades of experience in financial, investing and securities transactions. Under its business model, Ault
Lending generates revenue through origination fees charged to borrowers and interest generated from each loan. Ault Lending may also generate
income from appreciation of investments in marketable securities as well as any shares of common stock underlying convertible notes or
warrants issued to Ault Lending in any particular financing.
As noted above, we will from
time to time, through Ault Lending, engage in discussions with other companies interested in our subsidiaries or partner companies, either
in response to inquiries or as part of a process we initiate. To the extent we believe that a subsidiary partner companys further
growth and development can best be supported by a different ownership structure or if we otherwise believe it is in our stockholders
best interests, we will seek to sell some or all of our position in the subsidiary or partner company. These sales may take the form of
privately negotiated sales of stock or assets, mergers and acquisitions, public offerings of the subsidiary or partner companys
securities and, in the case of publicly traded partner companies, transactions in their securities in the open market. Our plans may include
taking subsidiaries or partner companies public through rights offerings, mergers or spin-offs and directed share subscription programs.
We will continue to consider these and functionally equivalent programs and the sale of certain subsidiary or partner company interests
in secondary market transactions to maximize value for our stockholders.
During 2025, we anticipate
providing significant new funding to expand Ault Lendings loan and investment portfolio. Ault Lending loans are made or arranged
pursuant to a California Financing Law license (Lic.no. 60 DBO77905).
**RiskOn International, Inc.**
*Overview*
RiskOns operations are primarily
those of BNC, which is engaged in the development and operation of an online gaming platform (the Platform). The Platform
offers engaging and dynamic online gaming experiences by integrating various elements such as gaming, social activities, sweepstakes,
online gaming and more. ROI aims to provide innovative ways for people in the United States to interact online. The Platform is located
at BitNile.com and is accessible via any device using any web browser, without requiring permissions, downloads, or apps.
BNCs games operate on a free-to-play model, whereby game players
may collect coins free of charge through the passage of time, free top-up feature, and, if a game player wishes to obtain coins above
and beyond the level of free coins available to that player, the player may purchase additional coin packages (Freemium
gaming model). However, no purchase is necessary to participate in any sweepstakes, and sweepstakes entries themselves cannot be purchased**.**
Once obtained, the coins (either free or purchased) cannot be redeemed for cash or exchanged for anything outside of the Platform. When
coins are used in the games, the game player could win and be awarded additional coins, or could lose and
lose the future use of those coins.
BNCs current and planned
products and experiences are:
|
|
|
Gaming.The Platform provides an extensive selection of gaming options, including participation in games, sweepstakes and social gaming experiences, such as Blackjack and roulette. | |
| | 19 | | |
| | |
|
|
|
Sweepstakes gaming.The Platform features a dedicated gaming zone for users to engage in sweepstakes gaming, offering opportunities to win real money and prizes. | |
|
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|
Socialization and connectivity.The Platforms ongoing mission will be to foster global connections by enabling users to interact with individuals, forming new friendships, collaborating on projects or engaging in conversations within various social hubs. | |
*Business Strategy*
The online sweepstakes gaming
industry in the United States is experiencing rapid growth and expansion, driven by advancements in technology and increased interest
in free-to-play and social gaming. BNCs business strategy revolves around creating a seamless, all-encompassing platform that caters
to various user needs and interests, particularly in sweepstakes and social gaming experiences.
The strategic pillars for the growth of the Platform include (i) leveraging
cutting-edge technology to offer a user-friendly, browser-based platform compatible with modern devices for an enhanced experience, (ii)
providing a diverse range of sweepstakes and gaming products that cater to users with different interests and preferences, (iii) fostering
connections and a sense of community among users, encouraging socialization and (iv) focusing on continuous innovation and regulatory
compliance to stay ahead of industry trends and customer expectations.
*Competition*
BNC faces competition from
both established online gaming platforms and new entrants in the market. It competes with recognized sweepstakes operatorssuch
as Chumba Casino, Stake.us, and Luckylandthat continually introduce new offerings in this evolving space. BNC also contends with
gaming-focused platforms like Fortnite and Roblox, as well as other social or casual games that vie for user attention. In addition, traditional
brick-and-mortar casinos are increasingly expanding their reach by introducing online components or apps, which further intensifies the
competitive landscape.
*Regulatory Environment: Present and Future
Challenges*
As the online gaming industry
continues to grow and evolve, regulatory challenges and considerations are becoming increasingly important. The nature of the Platform,
which often combines elements of gaming, social networking, and digital economies, presents a complex landscape for regulators to navigate.
To navigate the complex and
evolving regulatory landscape, BNC will prioritize compliance with relevant laws and regulations in all jurisdictions where it operates.
This includes data privacy and protection regulations, gaming and sweepstakes regulations, and intellectual property rights. By maintaining
a strong focus on regulatory compliance, BNC aims to minimize potential legal risks and build trust with users and partners.
**
Present Regulatory Challenges
The online gaming industry
is currently grappling with several regulatory challenges. First, data privacy and security concerns loom large, as users share personal
information and engage in transactions within the Platform. Regulators require that platforms comply with existing data protection regulations,
such as the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA).
Second, sweepstakes-specific
compliance poses unique hurdles because sweepstakes must be free to enter and cannot require a purchase for participation. Accordingly,
businesses must structure their sweepstakes to ensure adherence to state and federal laws, such as providing an alternative means of entry
and clear disclosures.
Third, intellectual property
rights become complicated when a platform relies on user-generated content and virtual goods or items. Copyright, trademark, and patent
laws can be difficult to enforce in virtual environments, raising questions about how best to protect and manage these rights.
| | 20 | | |
| | |
Fourth, taxation and financial
regulations come into play as virtual economies flourish, particularly with the rise of cryptocurrencies and non-fungible tokens. Regulators
must determine how to classify and tax digital assets and transactions, while also ensuring compliance with anti-money laundering and
know-your-customer requirements.
Lastly, content moderation
and liability remain pressing issues. Platforms must moderate content and user behavior while navigating potential liability for user-generated
content. This includes addressing possible violations of laws related to hate speech, harassment, and misinformation, all of which carry
significant legal and reputational risks.
Future Regulatory Challenges
As sweepstakes gaming continues
to develop and expand, several additional regulatory questions are likely to emerge. Payment processing and banking compliance may draw
heightened scrutiny as operators look for efficient ways to deliver prizes or credits, requiring compliance with anti-money laundering
and know-your-customer regulations in a sweepstakes context. Evolving state sweepstakes laws add further complexity, as each state imposes
unique statutes and regulations regarding contests, forcing operators to stay informed on registration or bonding requirements. Emerging
digital prize formats, such as virtual items or tokens, may require additional clarity from state and federal regulators to determine
their proper classification. Finally, accessibility and inclusivity concerns will likely increase, with regulators paying more attention
to ensuring that sweepstakes remain inclusive and transparent for all eligible participants
**askROI**
*Overview*
askROI is an AI-powered software-as-a-service
platform designed to help businesses leverage their data for competitive advantage. At the core of askROIs technology is a state-of-the-art
large language model (LLM), which is exclusively licensed from a third-party provider for use in North America. The askROI
platform is located at askroi.com and askROI dedicated applications are available for download on both the Apple and Google app marketplaces.
By seamlessly integrating
with a companys existing tools and data sources, askROI seeks to deliver actionable insights, intelligent analysis, and data-driven
decision support. The platforms LLM-powered technology allows it to interpret complex queries, identify relevant information, and
provide highly contextualized responses, all while continuously learning and adapting to each organizations unique language and
terminology.
Our vision is that askROI
can transform how businesses operate in the digital age. With our exclusive access to cutting-edge LLM technology and our commitment to
delivering tangible business value, askROI seeks to set a new standard for AI-powered insights and decision support in the North American
market.
askROIs current and
planned product functionality are:
|
| Seamless integration: askROI connects
with a wide range of business tools, including customer relationship management, cloud storage systems (e.g., OneDrive, Google Drive),
and communication platforms (e.g., Slack, Teams). Ongoing expansion of integration partnerships will further streamline data access and
analysis; | |
|
| Contextualized understanding: By referencing
secure, company-specific workspaces and knowledge bases rather than training the underlying LLM, askROI can deliver tailored insights
aligned with each organizations unique terminology, product names, and project codes. Ongoing refinements to the platforms
natural language processing capabilities will enable even more nuanced, context-aware analysis; | |
|
| Actionable insights: askROI analyzes data
to generate custom reports, draft data-rich presentations, and create visualizations like charts and graphs. Introduction of industry-specific
templates for reports, data visualizations, and analytics dashboards will provide additional value for users in targeted sectors; | |
|
| Transparency and security: askROI cites
specific data sources for its answers and provides direct document links for reference. Robust data security measures, including access
controls, encryption, and audit trails, seek to ensure the protection of sensitive information. Future updates will focus on achieving
compliance with key regulations such as GDPR, SOC 2, and payment card industry data security standards; | |
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| | |
|
| Ethical AI: Implementation of strict guidelines
and oversight mechanisms to ensure responsible development and use of askROIs AI models, mitigating risks of bias, discrimination,
or misuse; and | |
|
| Partner ecosystem: Development of a robust
network of consultancies, system integrators, and industry-specific solution providers to accelerate adoption and create tailored solutions
for diverse business needs. | |
By continually enhancing and
expanding its capabilities, askROI aims to position its platform as an indispensable tool for businesses seeking to leverage their data
for competitive advantage and operational excellence.
*Business Strategy*
askROI is currently in early
development, focusing on support and commercial applications. However, the platforms flexible architecture and powerful AI capabilities,
underpinned by its exclusive licensing agreement for the LLM technology in North America, position it for broad applicability across industries.
The go-to-market strategy involves continued refinement of the core product based on beta user feedback, followed by a staged rollout
to additional sectors.
Key strategic initiatives
include:
|
| Continued refinement of the core product based
on beta user feedback, followed by a staged rollout to additional sectors; | |
|
| Leveraging its exclusive LLM licensing agreement
to differentiate askROI in the North American market, attracting customers seeking advanced AI solutions; | |
|
| Using askROI as a dedicated application in both the Apple and Google app marketplaces, enabling mobile-first
experiences and expanding accessibility to on-the-go users; | |
|
| Expanding integration partnerships to ensure
askROI can seamlessly fit into diverse tech stacks, minimizing adoption barriers; | |
|
| Focusing marketing efforts on real-world use
cases and demonstrable return on investment, showcasing how askROI can drive tangible business outcomes; | |
|
| Building a strong partner ecosystem, including
consultants, system integrators, and industry-specific solution providers, to accelerate adoption; and | |
|
| Investing in research and development to maintain
a competitive edge in natural language processing, machine learning, and data analytics. | |
By adopting these strategic
initiatives and building on what we believe to be its unique LLM licensing advantages, askROI aims to position itself as a leading AI-powered
insights engine, setting the standard for data-driven decision-making and operational excellence.
*Competition*
We believe that askROIs
unique positioning as an AI-powered insights engine operating exclusively on a companys own data, differentiates it from both generic
AI tools and other enterprise search and analytics platforms.
Key differentiators include:
|
| Exclusive access to advanced LLM: we believe
that askROIs licensing agreement provides a significant competitive advantage, enabling the platform to leverage advanced natural
language processing capabilities; | |
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| | |
|
| Seamless integration with existing business
tools: By minimizing disruption to established workflows and enabling rapid adoption, askROI will reduce barriers to entry and increases
its appeal to potential customers; | |
|
| Ability to provide company-specific context:
Through secure, dedicated workspaces and knowledge bases, askROI accepts and indexes an organizations proprietary documents without
using them to train the underlying LLM. Instead, the platform queries these internal data sets on demand to generate relevant, context-rich
answers specific to each organizations terminology and needs. By keeping this data separate from the LLMs base model training,
askROI maintains data confidentiality while still delivering more accurate and actionable insights than generic AI solutions; | |
|
| Focus on delivering actionable insights:
askROI goes beyond simple data aggregation, empowering users to make informed decisions and drive tangible business outcomes; and | |
|
| Commitment to data security and privacy:
By ensuring that sensitive information remains protected and compliant with evolving regulations, askROI addresses a key concern for businesses
considering AI-driven solutions. | |
We believe that as the market
for AI-driven business tools continues to expand, askROI is well-positioned to capture market share through its advanced capabilities,
ease of use and strong commitment to customer success. askROIs LLM licensing arrangement provides an important differentiator,
but the rapid pace of AI innovation requires it to continually invest in research and development to maintain a competitive edge.
However, askROI also recognizes
the potential for competition from established enterprise software providers and emerging startups focused on AI-powered analytics and
decision support. To mitigate these competitive risks, askROI will focus on building a strong brand identity, cultivating a loyal customer
base, and leveraging its partner ecosystem to create advantages focused on its core offerings.
Ultimately, askROIs
success will depend on its ability to consistently deliver value to customers, stay at the forefront of technological innovation, and
adapt to the evolving needs of the market. By remaining agile, customer-centric, and committed to its vision of empowering businesses
through AI-driven insights, askROI is confident in its ability to thrive in the face of competition and position itself as a leader in
the market.
*Regulatory Environment (Present and Future)*
The regulatory landscape for
artificial intelligence and data-driven technologies continues to evolve worldwide, presenting both challenges and opportunities for askROI.
In various regions, including the United States, the European Union, and parts of Asia, governments and regulatory bodies are introducing
new legislation and guidelines specifically related to AI, data privacy, and automated decision-making. For example, the European Unions
draft AI Act proposes a risk-based approach that could place additional compliance requirements on AI developers. Some of our competitors,
particularly large, established technology companies, already have more extensive compliance frameworks or resources to adapt quickly,
giving them a potential advantage in the event of significant regulatory changes.
To address these developments,
askROI maintains a strong commitment to data protection and security. askROIs platform employs encryption, access controls, and
audit trails to safeguard customer information. At the same time, askROI recognizes that the rapid evolution of AI regulation may lead
to complex or overlapping legal requirements across various jurisdictions, ultimately increasing its compliance costs or limiting certain
functionalities. Consequently, askROI proactively engages with industry groups, policymakers and external advisors to stay informed about
emerging regulations and ensure that its platform aligns with current and anticipated standards.
Nevertheless, ongoing changes
in AI-related rules and interpretations of existing data-privacy laws could require askROI to make significant investments or modifications
to the askROI platform. Compliance obligations might include adding new audit capabilities or restricting how certain AI features function
to meet transparency or accountability requirements. In the event that these regulatory changes become more restrictive than anticipated,
askROIs operations could be adversely affected, and its ability to serve customers in certain markets could be limited.
| | 23 | | |
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**Circle 8**
*Description of the Business*
Headquartered in Houston,
Circle 8 is a premier lifting services provider serving clients in Texas, Oklahoma, Louisiana and New Mexico with five strategically located
branches in Texas and Oklahoma. Its modern fleet consists of 57 mobile all-terrain and hydraulic cranes, with lifting capacities of up
to 350 tons that provides services across the Eagle Ford, Permian, Delaware and Haynesville basins. Circle 8 is poised for organic growth
through a strengthened financial profile following its recapitalization in December 2022. Circle 8s fleet consists of Grove, Liebherr,
Xuzhou Construction Machinery Group and other leading original equipment manufacturers (OEMs).
Circle 8 provides experienced
professionally certified operators to deliver customized solutions to lifting clients in oil field services, construction, commercial,
refining / marketing and wind energy markets. Circle 8 maintains an industry leading safety record. Safety personnel hold certifications
and undergo in-house training.
*Competitive Advantage*
Circle 8s operating experience and the mid-sized diverse fleet
that it has developed serves the oil service and petrochemical industries, providing full-service lifting solutions with an industry leading
safety record. Key strengths of Circle 8 include:
|
|
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Leading lifting solutions platform | |
|
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|
Leading provider of comprehensive lifting solutions to diversified end markets, including oil & gas and with expanding operations in infrastructure, plant turn-around and commercial/industrial construction; and | |
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Leading market position with five branches strategically located throughout Texas and Oklahoma. | |
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Industry leading safety record, commitment and policy | |
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Safety is a core value and Circle 8 is a market leader in employee training and practices; and | |
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Dedicated team focused on safety programs. | |
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Proven strength of management, recently enhanced and augmented | |
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Proven ability to navigate a secular downturn by maintaining strong customer relationships and scale operations to capture additional market share; | |
|
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Seasoned industry leaders who have positioned Circle 8 for future growth; and | |
|
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Additional advisory team to supplement full time management with strategic industry knowledge, contacts and corporate transaction capability. | |
|
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|
High quality fleet with the opportunity to expand by 100% creates a barrier to entry. Circle 8s fleet of 57 cranes, as of the date of this Annual Report, comprises 47 all-terrain cranes and 10 hydraulic truck cranes with a combined average age of 9 years and capacity of up to 350 tons. | |
|
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Diversified blue-chip customers | |
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Entrenched provider to leading, well-capitalized oil and gas industry operators in Texas, New Mexico, Louisiana and Oklahoma; | |
|
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Diverse customer base with minimal customer concentration risk; and | |
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Longstanding relationships enable company to easily scale up operations with customers demands in the oilfield (upstream), commercial, construction, refining & marketing (downstream) and wind energy markets. | |
|
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Compelling utilization and financial profile | |
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Recently downsized underutilized cranes to return to pre-pandemic fleet utilization over 160%; and | |
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Substantial upside remains as the Company efficiently relocates and repurposes its fleet across geographies and end markets. | |
| | 24 | | |
| | |
*Industry*
In 2024, the U.S. lifting
solutions equipment distribution and rental industry experienced notable consolidation activities. United Rentals, Inc. (URI)
announced its intention to acquire H&E Equipment Services for approximately $4.8 billion, aiming to enhance its equipment capacity
and capitalize on the growing demand for equipment rentals in the United States. Additionally, URI completed the acquisition of Yak Access,
LLC, for approximately $1.1 billion, expanding its specialty business offerings. Herc Holdings, Inc. (HRI) also pursued
growth through acquisitions, completing nine acquisitions that added 28 locations and opening 23 new greenfield locations during the year.
Despite these consolidation efforts, the industry remains highly fragmented, comprising a mix of multi-location regional or national operators
and numerous small, independent businesses serving local markets. The industry's dynamics are influenced by various economic factors,
including trends in U.S. residential and non-residential construction, demand for construction machinery, and region-specific considerations.
Lifting solutions equipment continues to be distributed through two primary channels: equipment rental companies and equipment dealers.
Prominent equipment rental companies include URI, Sunbelt Rentals, and HRI, while notable equipment dealers include Finning and Toromont.
Circle 8 operates within a rental business segment that provides comprehensive project services, including labor and consumables. Similarly,
many pure equipment rental companies offer parts and service support to their customers.
*Sales and Marketing*
Led by Arnold Mabee and Brett
Rhuland, the sales force is highly specialized in lifting solutions sales to oil services customers, seeking long term purchase orders
and master service agreements. Circle 8 plans to continue the extensive training program which involves OEM training sessions on operations
and maintenance to ensure the entire sales force knows the fleet inside and out.
Circle 8 will be working with
continuing management to implement a back-office content resource management system that will be heavily focused on data collection so
that it can continue to improve margin and help streamline scheduling, operations and fleet management to optimize utilization.
*Competitive Business Strategy*
The oil services lifting
solutions demand has historically been one of the leading sub-segments of the industry for profitability due to high utilization rates
that coincide with the continuous workstreams of extraction. Circle 8 plans to expand this business line in both topline sales through
optimizing service and quality operations with a strong safety record.
In addition to expanding the
existing business, Circle 8 will seek to make additional forays into the infrastructure construction, the refinery and manufacturing plant
turn-around and industrial facility construction with the availability of new cranes as they become available.
*Customers*
With a focus on the oil services
sub-segment of the lifting solutions business in the Eagle Ford, Haynesville, Permian, Delaware and Anadarko basins, Circle 8 has a diversified
base of blue-chip customers in TX and OK. While about a third of its sales are expected to be made up from six of the largest players
in the industry, the remaining two thirds of sales will be highly diversified, leading to minimal concentration risk. With its longstanding
relationships with blue-chip customers and incoming fleet units, Circle 8 believes it has the ability to scale up sales with these customers
locally and most likely into other adjacent areas.
*Competition*
Due to the highly skilled
nature and competitive nature of the lifting solutions business, the sector typically consists of companies like Circle 8 that provide
full service lifting solutions on rental or contract basis, including the manpower required to operate the equipment or companies that
require extensive lifting solutions straight purchasing the equipment and hiring crane operators directly.
The full-service lifting solutions
business is highly fragmented and local with only a few national service providers. In Circle 8s existing subsegment of the lifting
solutions business to the petrochemical industry, the competition is not as strong as it is in others as the contract terms are usually
longer term and driven by maintaining strong customer relationships. The diversification strategy for Circle 8 into other subsegments
will be faced with competition that is largely driven based on availability, quality (including safety record), reliability and price.
| | 25 | | |
| | |
*Environmental and Safety Regulations*
Circle 8s equipment,
facilities and operations are subject to comprehensive and frequently changing federal, state and local environmental and occupational
health and safety laws, which may vary locally. These laws regulate (1) the handling, storage, use and disposal of hazardous materials
and waste and, if any, the associated cleanup of properties affected by pollutants; (2) air quality (emissions); and (3) wastewater. While
lifting solutions operations generally do not raise significant environmental risks, Circle 8 uses petroleum products, solvents
and other hazardous substances for fueling and maintaining its fleet and vehicles. Circle 8 has made, and will continue to make, capital
and other expenditures to comply with environmental requirements. Circle 8 does not currently anticipate any material adverse effect on
its business, financial condition or competitive position as a result of its efforts to comply with such requirements.
In the future, federal, state
or local governments could enact new or more stringent laws or issue new or more stringent regulations concerning environmental and worker
health and safety matters, reporting and disclosure obligations, or effect a change in their enforcement of existing laws or regulations,
that could affect operations and increase operational and compliance expenditures. Also, in the future, contamination may be found to
exist at Circle 8s facilities or off-site locations where waste has been sent. There can be no assurance that Circle 8, or various
environmental regulatory agencies, will not discover previously unknown environmental non-compliance or contamination. Circle 8 could
be held liable for such newly discovered non-compliance or contamination. It is possible that changes in environmental and worker health
and safety laws or liabilities from newly discovered non-compliance or contamination could have a material adverse effect on Circle 8s
business, financial condition and results of operations.
****
**AGREE**
AGREE is actively invested
across a diverse range of commercial real estate asset classes, with a particular focus on hospitality and in the future, multifamily
properties. AGREE strategically targets the middle market segment in geographic areas that present strong fundamentals and offer relative
value, such as emerging or overlooked markets with growth potential. AGREEs core objective is to deliver attractive, risk-adjusted
returns through a combination of ground-up development, targeted capital investments, and operational enhancements that unlock long-term
value.
In the hospitality sector,
AGREE brings a hands-on, value-driven approach that goes beyond traditional ownership. Recognizing the unique dynamics of hospitality
real estatewhich blends real estate investment with service-based business operationsAGREE prioritizes both physical improvements
and elevated guest experiences to drive performance. By focusing on midscale to upper-midscale hotels in underpenetrated markets, AGREE
positions its hospitality assets to capture stable demand from business and leisure travelers alike.
A key component of AGREEs
hospitality platform is AGREE Madison, a wholly owned subsidiary that operates four recently renovated hotel properties in the Midwest.
These include the Hilton Garden Inn Madison West, Residence Inn Madison West, Courtyard Madison West, and Hilton Garden Inn Rockford.
AGREE operates a total of 526 keys collectively across the four-property portfolio. Each property has undergone substantial upgrades since
acquired to enhance both aesthetic appeal and operational efficiency, ensuring they meet modern traveler expectations while maintaining
cost discipline. Through AGREE Madison, the firm exercises direct oversight of day-to-day operations, ensuring alignment with its broader
investment philosophy of value creation through active management.
**TurnOnGreen**
*Overview*
TurnOnGreen,
through its wholly owned subsidiaries Digital Power and TOG Technologies, is an emerging provider of premium power electronic and EV charging
solutions. TurnOnGreen designs, develops, manufactures, and sells highly engineered, feature-rich, high-grade power conversion systems
and power solutions for mission-critical, life-sustaining, and lifesaving applications across a variety of sectors, particularly those
operating in demanding and harsh environments. TurnOnGreen serves a broad range of markets, including defense and aerospace, medical and
healthcare, industrial applications, telecommunications, e-Mobility, and OEM solutions. TurnOnGreens products are highly adaptive,
featuring customized firmware meticulously configured to meet the specific requirements and challenges of its customers applications.
Approximately 8% of TurnOnGreens revenue is generated leveraging its core power technologies to deliver comprehensive EV charging
infrastructure and subscription-based charging network management services for residential, fleet, hospitality, workplace, healthcare,
municipal, and educational environments including universities and schools.
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At
Digital Power, TurnOnGreen provides a comprehensive range of integrated power system solutions that are designed to meet the diverse and
precise needs of its customers with the highest levels of efficiency, flexibility and scalability. Digital Power designs, develops and
manufactures custom power systems to meet performance and/or form-factor requirements that cannot be met with standard power products.
These power system solutions are designed to function reliably in harsh environments associated with defense and aerospace applications,
while also being utilized for applications ranging from industrial and telecommunications equipment to medical instrumentation. TurnOnGreen
believes that Digital Powers power products are highly adaptive and feature digital power management and software configurations
that allow them to achieve higher power efficiency to meet the requirements of both its customers and its OEMs. In addition to Digital
Powers custom power system solutions, it also provides a wide range of industry-standard power products. These products include
the AC/DC open frame product series, which TurnOnGreen believes to be among the industrys leading power switchers in terms of power
efficiency. The open frame products are deployed in highly compact form factors and modular power series that support configurable multiple
DC outputs. Additionally, Digital Power offers high-power and high-voltage laser power supplies tailored to meet the unique requirements
of medical, dental, and industrial pulsed energy systems. Digital Powers expertise also encompasses high-performance and high-power
data-center power supplies, semiconductor fabrication equipment power source supplies, desktop power supplies, and a comprehensive range
of value-added customized AC/DC and DC/DC ruggedized power supply and system solutions.
**
**Our
Strategy**
Our business strategy is designed
to increase stockholder value. Under this strategy, we are focused on managing and financially supporting our existing subsidiaries and
partner companies, with the goal of pursuing monetization opportunities and maximizing the value returned to stockholders. We have, are
and will consider initiatives including, among others: public offerings, the sale of individual partner companies, the sale of certain
or all partner company interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize
stockholder value, such as activist trading. We anticipate returning value to stockholders after satisfying our debt obligations and working
capital needs.
Our Executive Committee approves
and manages our investment strategy. Upon making an investment, we often become actively involved in the companies we seek to acquire.
That activity may involve a broad range of approaches, from influencing the management of a target to take steps to improve stockholder
value, to acquiring a controlling or sizable but non-controlling interest or outright ownership of the target company in order to implement
changes that we believe are required to improve its business, and then operating and expanding that business.
From time to time, we engage
in discussions with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of
a process we initiate. To the extent we believe that a subsidiary partner companys further growth and development can best be supported
by a different ownership structure or if we otherwise believe it is in our shareholders best interests, we will seek to sell some
or all of our position in the subsidiary or partner company. These sales may take the form of privately negotiated sales of stock or assets,
mergers and acquisitions, public offerings of the subsidiary or partner companys securities and, in the case of publicly traded
partner companies, transactions in their securities in the open market. Our plans may include taking subsidiaries or partner companies
public through rights offerings and directed share subscription programs. We will continue to consider these and functionally equivalent
programs and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize value for our shareholders.
*Management Strategy*
Our
management strategy involves the proactive financial and operational management of the businesses we own in order to increase cash flows
and stockholder value. Hyperscale Data actively oversees and supports the management teams of each of our businesses by, among other things:
|
|
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recruiting and retaining talented managers to
operate our businesses using structured incentive compensation programs, including non-controlling equity ownership, tailored to each
business; | |
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regularly monitoring financial and operational
performance, instilling consistent financial discipline, and supporting management in the development and implementation of information
systems to effectively achieve these goals; | |
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assisting management in their analysis and pursuit
of prudent organic growth strategies; | |
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identifying and working with management to execute
attractive external growth and acquisition opportunities; | |
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|
assisting management in controlling and right-sizing
overhead costs; | |
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nurturing an internal culture of transparency,
alignment, accountability and governance, including regular reporting; | |
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professionalizing our subsidiaries at scale; and | |
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forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives. | |
Specifically,
while our businesses have different growth opportunities and potential rates of growth, we expect Hyperscale Data to work with the management
teams of each of our businesses to increase the value of, and cash generated by, each business through various initiatives, including:
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making selective capital investments to expand
geographic reach, increase capacity, or reduce manufacturing costs of our businesses; | |
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investing in product research and development
for new products, processes or services for customers; | |
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improving and expanding existing sales and marketing
programs; | |
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pursuing reductions in operating costs through
improved operational efficiency or outsourcing of certain processes and products; and | |
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consolidating or improving management of certain overhead functions. | |
Our
businesses typically acquire and integrate complementary businesses. We believe that complementary add-on acquisitions improve our overall
financial and operational performance by allowing us to:
|
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leverage manufacturing and distribution operations; | |
|
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leverage branding and marketing programs, as well
as customer relationships; | |
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add experienced management or management expertise; | |
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increase market share and penetrate new markets;
and | |
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realize cost synergies by allocating the corporate overhead expenses of our businesses across a larger number of businesses and by implementing and coordinating improved management practices. | |
**Compliance with Material Government (Including
Environmental) Regulations**
**Sentinum**
Sentinum is subject to various
federal, state, local and non-U.S. laws and regulations relating to environmental protection and remediation of hazardous substances and
wastes. Sentinum continually assesses compliance status and management of environmental matters to ensure our operations are in compliance
with all applicable environmental laws and regulations. Investigation, remediation, and operation and maintenance costs associated with
environmental compliance and management of sites are a normal, recurring part of operations. While Sentinums regulatory compliance
costs are currently not considered material, it is possible that costs incurred to ensure continued environmental compliance could have
a material impact on results of operations, financial condition or cash flows if new areas of soil, air and groundwater contamination
are discovered and/or expansions of work scope are prompted by the results of ongoing monitoring.
The Michigan Facility is subject to a final corrective measures plan
with the Environment Protection Agency. The seller performed remedial activities at the Michigan Facility relating to historical soil
and groundwater contamination and Sentinum is responsible for ongoing monitoring and final remediation plans. We estimate the cost of
the environmental remediation obligation is approximately $0.4 million and reflects our best estimate of probable future costs for remediation
based on the current assessment data and regulatory obligations. Future costs will depend on many factors, including the extent of work
necessary to implement monitoring and final remediation plans and ACSs time frame for remediation. We may incur actual costs in
the future that are materially different than this estimate and such costs could have a material impact on results of operations, financial
condition, and cash flows during the period in which they are recorded.
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**TurnOnGreen**
TurnOnGreens businesses
are heavily regulated in most of its markets. TurnOnGreen handles power electronics products mainly in the form of power conversion. TurnOnGreen
must take into account several standards for electronic safety to protect the health of humans and animals. TurnOnGreen serves diverse
markets including automotive, defense/aerospace, medical/healthcare, industrial and telecommunications, each of which has its own set
of safety regulations and standards that TurnOnGreen must comply with.
Government Contracts.
The U.S. Government, and other governments, may terminate any of TurnOnGreens government contracts at their convenience, as well
as for default based on our failure to meet specified performance requirements. If any of TurnOnGreens U.S. Government contracts
were to be terminated for convenience, TurnOnGreen would generally be entitled to receive payment for work completed and allowable termination
or cancellation costs. If any of TurnOnGreens government contracts were to be terminated for default, generally the U.S. Government
would pay only for the work that has been accepted and could require TurnOnGreen to pay the difference between the original contract price
and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S. Government can also hold
TurnOnGreen liable for damages resulting from the default.
Medical device power supplies.
TurnOnGreens medical power supplies must incorporate one or more means of protection (MOP) to avoid electrocution.
A MOP can be safety insulation, a protective earth, a defined creepage distance, an air gap (clearance) or other protective impedance.
These can be used in various combinations - having two MOPs means if one fails, there is another in place. A MOP can be achieved through
safety insulation, protective earth, a defined creepage distance, an air gap, other protective impedances, or by implementing a combination
of these techniques. TurnOnGreen must comply with a standard that treats operators and patients, resulting in the classifications means
of operator protection and means of patient protection. The latter requirements are more stringent because the patient
may be physically connected via an applied part and unconscious when the fault occurs.
Environmental. TurnOnGreen
is subject to various federal, state, local and non-U.S. laws and regulations relating to environmental protection, including the discharge,
treatment, storage, disposal and remediation of hazardous substances and wastes. TurnOnGreen continually assesses its compliance status
and management of environmental matters to ensure that its operations are in compliance with all applicable environmental laws and regulations.
Investigation, remediation, and operation and maintenance costs associated with environmental compliance and management of sites are a
normal, recurring part of TurnOnGreens operations.
Non-U.S. Sales. TurnOnGreens
non-U.S. sales are subject to both U.S. and non-U.S. governmental regulations and procurement policies and practices, including regulations
relating to import-export control, tariffs, investment, exchange controls, anti-corruption, and repatriation of earnings. Non-U.S. sales
are also subject to varying currency, political and economic risks.
*Other Compliance Matters*
In addition, we are subject
to the local, state and national laws and regulations of the jurisdictions where we operate that affect companies generally, including
laws and regulations governing commerce, intellectual property, trade, health and safety, contracts, privacy and communications, consumer
protection, web services, tax, and corporate laws and securities laws. These regulations and laws may change over time. Unfavorable changes
in existing and new laws and regulations could increase our cost of doing business and impede our growth.
**Research and Development**
During the years ended December
31, 2024 and 2023, we spent approximately $11.0 million and $4.4 million, respectively, on research and development.
**Human Capital Resources**
We are committed to attracting
and retaining the brightest and best talent, so investing in human capital is critical to our success. The employee traits we value include
industriousness, intellectual curiosity, growth mindset and deeply caring about the quality of work. The human capital measures and objectives
that we focus on in managing our business include employee safety, talent acquisition and retention, employee engagement, development
and training, diversity and inclusion, and compensation and pay equity. None of our employees is represented by a collective bargaining
unit or is a party to a collective bargaining agreement. We believe that our relationship with our employees is good.
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The following description
provides an overall view of our Company. Since we are a holding company, however, every statement may not be applicable to every subsidiary,
particularly since some are located in foreign countries.
**Employee Profile**
As of December 31, 2024, we
had 424 employees located in the U.S. and the U.K., of whom 15 were engaged in engineering and product development, 30 in sales and marketing,
328 in general operations and 51 in general administration and finance. All but 50 of these employees are employed on a full-time basis.
None of our employees is currently represented by a trade union. We consider our relations with our employees to be good.
As of December 31, 2024, approximately
26% of our current workforce is female, 74% male, and our average tenure is 3.5years, a decrease of 45% from an average tenure of
6.4 years as of December 31, 2023.
*Talent*
A core tenet of our talent
system is to both develop talent from within and supplement with external hires. This approach has yielded loyalty and commitment in our
employee base which in turn grows our business, our products, and our customers, while adding new employees and external ideas supports
a continuous improvement mindset and our goals of a diverse and inclusive workforce.
We believe we materially comply
with all applicable state, local and international laws governing nondiscrimination in employment in every location in which we operate.
All applicants and employees are treated with the same high level of respect regardless of their gender, ethnicity, religion, national
origin, age, marital status, political affiliation, sexual orientation, gender identity, disability or protected veteran status.
*Employee Engagement and Development*
Our employee engagement efforts
include our frequent and transparent all-hands meetings and executive communications, through which we aim to keep our employees
well-informed and to increase transparency. We believe in continual improvement and use employee feedback to drive and improve processes
that support our customers and ensure a deep understanding of our employees needs. We plan to conduct annual confidential employee
surveys as we believe that ongoing performance feedback encourages greater engagement in our business and improves individual performance.
Our employees will participate in a 360-degree evaluation process to identify critical capabilities for development and establish new
stretch goals.
*Pay Equity*
Our employee compensation
strategy supports three primary objectives: attract and retain the best team members; reflect and reinforce our most important values;
and align team member interests with stockholder interests in building enduring value. We believe people should be paid for what they
do and how they do it, regardless of their gender, race or other personal characteristics. To deliver on that commitment, we benchmark
and set pay ranges based on market data and consider factors such as an employees role and experience, the location of their job,
and their performance. We also regularly review our compensation practices, both in terms of our overall workforce and individual employees,
to ensure our pay is fair and equitable.
*Total Rewards*
As part of our compensation
philosophy, we believe that we must offer and maintain market competitive total rewards programs for our employees in order to attract
and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, healthcare and
insurance benefits, paid time off, family leave, family care resources and flexible work schedules. We established a Company matched 401(k)
plan during 2021.
*Health and Safety*
The success of our business
is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees.
We provide our employees and their families with access to a variety of flexible and convenient health and welfare programs, including
benefits that support their physical and mental health by providing tools and resources to help them improve or maintain their health
status; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families.
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ITEM 1A. | RISK FACTORS | |
An investment in our Class
A common stock involves significant risks. You should carefully consider the following risks and all other information set forth in this
Annual Report before deciding to invest in our Class A common stock. If any of the events or developments described below occurs, our
business, financial condition and results of operations may suffer. In that case, the value of our Class A common stock may decline and
you could lose all or part of your investment.
You should consider each of
the following risk factors and any other information set forth in this Annual Report and the other reports filed by the Company with the
SEC, including the Companys financial statements and related notes, in evaluating the Companys business and prospects. The
risks and uncertainties described below are not the only ones that impact on the Companys operations and business. Additional risks
and uncertainties not presently known to the Company, or that the Company currently considers immaterial, may also impair its business
or operations. If any of the following risks actually occurs, the Companys business and financial condition, results or prospects
could be harmed. Please also read carefully the section entitled Cautionary Note About Forward-Looking Statements at the
beginning of this Annual Report.
**Risks Related to Our Company**
**We have an evolving business model, which increases the complexity
of our business.**
Our business model has evolved
in the past and continues to do so. In prior years we have added additional types of services and product offerings and in some cases,
we have modified or discontinued those offerings. We intend to continue to try to offer additional types of products or services, and
we do not know whether any of them will be successful. From time to time we have also modified aspects of our business model relating
to our product mix. We do not know whether these or any other modifications will be successful. The additions and modifications to our
business have increased the complexity of our business and placed significant strain on our management, personnel, operations, systems,
technical performance, financial resources, and internal financial control and reporting functions. Future additions to or modifications
of our business are likely to have similar effects. Further, any new business or website we launch that is not favorably received by the
market could damage our reputation or our brand. The occurrence of any of the foregoing could have a material adverse effect on our business.
**We are heavily dependent on our senior management,
and a loss of a member of our senior management team could cause our stock price to suffer**.
If we lose the services of
Milton C. Ault, III, our Executive Chairman, William B. Horne, our Chief Executive Officer, Henry Nisser, our President and General Counsel,
or Ken Cragun, our Chief Financial Officer and/or certain key employees, we may not be able to find appropriate replacements on a timely
basis, and our business could be adversely affected. Our existing operations and continued future development depend to a significant
extent upon the performance and active participation of these individuals and certain key employees. Although we have entered into employment
agreements with Messrs. Ault, Horne and Nisser, and we may enter into employment agreements with additional key employees in the future,
we cannot guarantee that we will be successful in retaining the services of these individuals. If we were to lose any of these individuals,
we may not be able to find appropriate replacements on a timely basis and our financial condition and results of operations could be materially
adversely affected.
**We rely on highly skilled personnel and the
continuing efforts of our executive officers and, if we are unable to retain, motivate or hire qualified personnel, our business may be
severely disrupted.**
Our performance largely depends on the talents, knowledge, skills,
know-how and efforts of highly skilled individuals and in particular, the expertise held by our Executive Chairman, Milton C. Ault, III.
His absence, were it to occur, would materially and adversely impact the development and implementation of our projects and businesses.
Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all
areas of our organization. Our continued ability to compete effectively depends on our ability to attract, among others, new technology
developers and to retain and motivate our existing contractors. If one or more of our executive officers are unable or unwilling to continue
in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted,
and we may incur additional expenses to recruit and retain new officers. In addition, if any of our executives joins a competitor or forms
a competing company, we may lose some customers.
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**We may not be able to utilize our net operating loss carryforwards.**
As of December 31, 2024, we
had federal and state net operating loss carryforwards (NOLs) for income tax purposes of approximately $134.4 million and
$204.9 million, respectively, after application of the limitations set forth in Section 382 of the Internal Revenue Code. In accordance
with Section 382, future utilization of our NOLs is subject to an annual limitation as a result of ownership changes that occurred previously.
We also maintain NOLs in various foreign jurisdictions.
**Risks Related to Our Indebtedness and Liquidity**
**We will need to raise additional capital to
fund our operations in furtherance of our business plan.**
Until
we are profitable, we will need to quickly raise additional capital in order to fund our operations in furtherance of our business plan.
The proposed financing may include shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred
stock, debt securities, units consisting of the foregoing securities, equity investments from strategic development partners or some combination
of each. Any additional equity financings may be financially dilutive to, and will be dilutive from an ownership perspective to, our stockholders,
and such dilution may be significant based upon the size of such financing. Additionally, we cannot assure that such funding will be available
on a timely basis, in needed quantities, or on terms favorable to us, if at all.
**If we are unable to
comply with the covenants or restrictions contained in the Loan Agreement with our senior secured lender, the lender could declare all
amounts outstanding under the Loan Agreement to be due and payable and foreclose on its collateral, which could materially adversely affect
our financial condition and operations.**
As
previously announced, on December 14, 2023, we, along with our wholly owned subsidiaries Sentinum, ACS, BNI Montana, Ault Lending, Ault
Aviation and AGREE, entered into the Loan Agreement with institutional lenders, pursuant to which Ault & Company borrowed $36 million
and issued Secured Notes to the lenders in the aggregate amount of $38.9 million. Pursuant to the Loan Agreement, we, and the other Guarantors,
agreed to act as guarantors for repayment of the Secured Notes. In addition, certain Guarantors entered into various agreements as collateral
in support of the guarantee of the Secured Notes, including (i) a security agreement by Sentinum, pursuant to which Sentinum granted to
the Lenders a security interest in (a) the Miners, (b) all of the digital currency mined or otherwise generated from the Miners and (c)
the membership interests of ACS, (ii) a security agreement by the Company, Ault Lending, BNI Montana and AGREE, pursuant to which those
entities granted to the lenders a security interest in substantially all of their assets, as well as a pledge of equity interests in Ault
Aviation, AGREE, Sentinum, Ault Energy, Eco Pack, and Circle 8 Holdco, (iii) a future advance mortgage by ACS on the Michigan Property,
(iv) an aircraft mortgage and security agreement by Ault Aviation on the Aircraft, and (v) deposit account control agreements over certain
bank accounts held by certain of our subsidiaries. The Loan Agreement has customary representations, warranties and covenants including
restrictions on indebtedness, liens, restricted payments and dividends, investments, asset sales and similar covenants and contains customary
events of default.
The
covenants and other restrictions contained in the Loan Agreement and other current or future debt agreements could, among other things,
restrict our ability to dispose of assets, incur additional indebtedness, pay dividends or make other restricted payments, create liens
on assets, make investments, loans or advances, make acquisitions, engage in mergers or consolidations and engage in certain transactions
with affiliates. These restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs
or otherwise restrict corporate activities. In addition, substantially all of our borrowed money obligations are secured by certain of
our assets.
A
failure to comply with any restrictions or covenants in the Loan Agreement, or to make payments into the Segregated Account when due or
make other payments we are obligated to make under Loan Agreement, could have serious consequences to our financial condition or result
in a default under the Loan Agreement and under other agreements containing cross-default provisions. A default would permit lenders to
accelerate the maturity of the debt under these debt agreements and to foreclose upon collateral securing the debt, among other remedies.
Furthermore, an event of default or an acceleration under one of our debt agreements could also cause a cross-default or cross-acceleration
of another debt instrument or contractual obligation, which would adversely impact our liquidity. Under these circumstances, we might
not have sufficient funds or other resources to satisfy all of our obligations. We may not be granted waivers or other amendments to these
debt agreements if for any reason we are unable to comply with these debt agreements, and we may not be able to restructure or refinance
our debt on terms acceptable to us, or at all. Whether or not those kinds of actions are successful, we might seek protections of applicable
bankruptcy laws. Additionally, all of our indebtedness is senior to the existing common stock in our capital structure. If we were to
seek certain restructuring transactions, our creditors would experience better returns as compared to our equity holders. Any of these
actions could have a material adverse effect on the value of our equity and on our business, financial performance, and liquidity.
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**To service any future indebtedness and other obligations,
we will require a significant amount of cash.**
Our ability to generate cash
depends on many factors beyond our control, and any failure to meet our debt service obligations, of which we currently have very few
but may in the future incur, including our obligations under our indebtedness or future outstanding shares of preferred stock, could harm
our business, financial condition and results of operations. Our ability to make payments on and to refinance any indebtedness and outstanding
preferred stock and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the
future. This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other
factors that are beyond our control.
If our business does not generate
sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us and our subsidiaries
to pay our indebtedness or make dividend payments with respect to our any shares of preferred stock that we may issue, or to fund our
other liquidity needs, we may need to refinance all or a portion of our indebtedness or redeem the preferred stock, on or before the maturity
thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse
effect on us.
In addition, we may not be
able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance
our indebtedness or redeem the preferred stock will depend on the condition of the capital markets and our financial condition at such
time. Any refinancing of our debt or financings related to the redemption of any shares of preferred stock that we may issue could be
at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
The terms of future debt instruments or preferred stock may limit or prevent us from taking any of these actions. In addition, any failure
to make scheduled payments of interest and principal on any future outstanding indebtedness or dividend payments on any shares of preferred
stock that we may issue could harm our ability to incur additional indebtedness or otherwise raise capital on commercially reasonable
terms or at all. Our inability to generate sufficient cash flow to satisfy any future debt service and other obligations, or to refinance
or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our
business, financial condition and results of operations.
**Risks Related to Circle 8**
**Circle 8 uses substantial leverage in its capital
structure which could adversely affect its financial condition. Although Circle 8s debt-to-EBITDA ratio is below the industry median,
operational disruptions or economic shocks could hinder Circle 8s ability to service its debt and impact its solvency. Additionally,
the industry tends to heavily rely on debt to finance expansionary initiatives, whether through organic growth or acquisitions.**
Circle 8 currently has a substantial
amount of outstanding debt. As of December 31, 2024, it had total outstanding indebtedness of approximately $16.6 million, of which $13.1
million was borrowed from First Citizens Bank (FCB) in a senior secured asset-based revolving line of credit, $1.9 million
consists of outstanding equipment notes with Manitowoc Finance (MANF) and SQN Capital Management, LLC (SQN), $.9
million of outstanding vehicle notes with Ford Motor Credit (FMC) and a $.6 million short term unsecured note with Meridian
Finance LLC. Circle 8 has the ability to increase the FCB loan by $7.4 million as of December 31, 2024. Circle 8 may further increase
its debt balance where permitted by incumbent lenders for growth and expansionary purposes. Circle 8s substantial indebtedness
could have important consequences. For example, it may:
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| increase Circle 8s vulnerability to general
adverse economic, industry and competitive conditions; | |
|
| require management to dedicate a substantial
portion of Circle 8s cash flow from operations to interest payments and principal repayment, thereby reducing the availability
of cash flow to fund working capital, capital expenditures, acquisitions, dividend payments to its owners and other general corporate
purposes; | |
|
| limit Circle 8s flexibility in planning
for, or reacting to, changes in Circle 8s specific business and the industry in which it operates; | |
|
| place Circle 8 at a competitive disadvantage
compared to its competitors that have less debt; and | |
|
| limit Circle 8s ability to obtain additional
financing for working capital, capital expenditures, acquisitions or general corporate purposes. | |
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Circle 8 expects to use cash
flow from operations and borrowings under the FCB commitment to meet current and future financial obligations, including funding operations,
debt service and capital expenditures. Circle 8s ability to make these payments depends on future operational performance, which
will be affected by financial, business, economic and other factors, many of which Circle 8 cannot control. Circle 8s business
may not generate sufficient cash flow from operations in the future or be able to appropriately adjust operations to suit organic industry
developments, which could result in Circle 8s inability to service its debt obligations, or to fund other liquidity needs. If Circle
8 has insufficient capital to cover its debt obligations, it may be forced to reduce or delay ongoing or growth activities and capital
expenditures, sell assets, obtain additional debt or dilutive equity capital or restructure or refinance all or a portion of its debt,
including the incumbent FCB, MANF,SQN and FMC loans, and any other incremental loans, on or before maturity. There can be no assurance
that Circle 8 will be able to accomplish any of these alternatives on terms acceptable to it or to us, if at all. In addition, the terms
of existing or future indebtedness, including the agreements governing the incumbent loans, may limit Circle 8s ability to pursue
any other alternatives.
**While Circle 8 has had an industry-leading
safety record throughout its history, it operates in a potentially hazardous industry, and any safety incident could significantly impact
its operations. A blemish on Circle 8s safety record could lead to direct consequences such as fines, levies, and increased insurance
premiums, as well as indirect consequences such as customers preferring competitors with better safety records.**
The lifting solutions business
is inherently risky, and accidents can occur due to a variety of factors, including negligence and unforeseeable events. Despite this,
Circle 8 has maintained an industry-leading safety record and has not experienced any incidents that have significantly impacted its operations.
While Circle 8 has a safety program in place, it cannot guarantee protection against unforeseeable events or acts of God.
Any safety transgressions can have a material impact on sales and operating results, leading to fines and levies, and potentially causing
customers to prefer competitors with better safety records. Therefore, Circle 8 places a great emphasis on maintaining its safety program
and continually improving its practices to minimize the risk of incidents occurring.
**The lifting solutions business is dependent
on the domestic oil markets activity, oil pricing, construction and industrial activities, and the overall economic conditions.
Any downturn in these areas could adversely affect the demand for lifting solutions, leading to decreased sales and lower lifting solutions
prices, which may result in a decline in Circle 8s revenues, gross margins and operating results.**
Circle 8 primarily provides
lifting solutions for the U.S. domestic oil market. As such, any downturn in the U.S. domestic oil market or the economy as a whole could
result in reduced demand for its services or lower sales prices. Additionally, its business may face temporary or long-term negative impacts
due to:
|
| a reduction in extraction levels by customers
due to increased costs and break-even oil price and lower levels of reserves due to depletion of existing reserves and resources; | |
|
| exploration and drilling are capital intensive
and results are uncertain, which may limit Circle 8s current clients demand for Circle 8s services and adversely
affect its ability to generate new clients; | |
|
| until it executes on its expansion program, dependence
on a limited number of clients in a niche oil services market could make Circle 8 vulnerable compared to larger industry incumbents with
greater client diversity; | |
|
| unfavorable credit and equity markets affecting
end-user access to capital or cost of capital, also potentially increasing the all-in cash costs and break-even oil prices may make operations
of its current and future clients no longer economically viable; | |
|
| adverse changes in federal, state, tribal and
local government infrastructure spending; | |
|
| an increase in the cost of consumables and construction
materials related to oil extraction and infrastructure construction; | |
|
| adverse weather conditions or natural disasters
which may affect a particular region; | |
| | 34 | | |
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| a decrease in the level of exploration, development,
production activity and capital spending by oil and natural gas companies; | |
|
| an increase in inflationary pressure on materials
and labor; | |
|
| labor issues such as strikes or worker shortages; | |
|
| a prolonged shutdown of the U.S. government; | |
|
| an increase in interest rates; | |
|
| supply chain disruptions; | |
|
| changes in federal and state regulations related
to climate change and greenhouse gas emissions may materially adversely impact Circle 8s and/or its clients revenues, operating
results and profitability; | |
|
| public health crises and epidemics; or | |
|
| terrorism or hostilities involving the United
States and/or its allies. | |
Weakness or deterioration
in the oil services industry, renewables infrastructure construction, plant turn-around and public and industrial infrastructure construction
sectors caused by the above or other factors could have a material adverse effect on Circle 8s financial position, results of operations
and cash flows in the future and may also have a material adverse effect on residual values realized on the disposition of the existing
and future rental fleet.
**Circle 8s business is highly reliant
on the availability of specialized skilled labor, and this dependency is particularly pronounced given the current scarcity of domestic
U.S. skilled labor. This scarcity is at an all-time high, which is further compounded as labor requirements to operate in Circle 8 s
business becomes even more specialized.**
The lifting solutions business
requires licensed operators to operate safely and within U.S. domestic regulatory requirements. It takes several months and material funding
to be trained to become a licensed crane operator, making the availability of qualified labor scarce for the lifting solutions industry
in general and specifically in remote locations in which Circle 8s client set operates its oil services. Availability of labor
may have a significant impact on Circle 8s ability to service its current client set and to be able to execute on its expansion
program.
Additionally, the training
and licensing requirements for crane operators can vary by state and even by municipality, which can create further challenges for Circle
8 in sourcing and deploying qualified labor in different geographic locations. Moreover, the competitive labor market for skilled workers
in the oil services industry could potentially drive-up labor costs for Circle 8, which would impact its profitability and competitiveness.
**Circle 8s business is, directly and
indirectly, dependent on a functioning global supply chain system. The oil and steel markets are global, and many suppliers, vendors,
OEMs and parts manufacturers for Circle 8 and its clients industries are offshore.**
The lifting solutions business
success is heavily dependent on the availability and efficient conversion to elevated utilization rates of the lifting assets. These metrics
can be fundamentally impacted by the functionality of the global supply chain, which plays several roles in the lifting solutions business.
For example, supply chain disruptions could delay the delivery of critical parts and components needed for maintenance and repair of lifting
assets, leading to longer downtime periods and reduced utilization rates.
In addition, fluctuations
in commodity prices could impact the cost of raw materials needed to manufacture lifting assets, potentially affecting the companys
profitability. These fluctuations, among others, could impact the efficiency and profitability of Circle 8s lifting solutions business
and can be impacted by a variety of factors, including the following:
|
| possible geopolitical unrest and conflict may
impact ability to receive new parts or new cranes in a timely manner, if at all, to optimize utilization and ultimately, profitability; | |
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|
| reliance on foreign suppliers for cranes and
exposure to trade embargoes could impede its ability to procure necessary parts and equipment to execute its growth strategies and maintain
its fleet; | |
|
| inflationary pressures resulting from supply
chain disruptions and labor shortages could make it difficult for Circle 8 to repair and replace its crane equipment at regular costs; | |
|
| fuel price escalation could have a material impact
on gross profit since it is typically approximately 7% of the operating cost structure in recent history; | |
|
| oil market sanctions and political pressure on
domestic production reduction may adversely impact Circle 8s core clients and its revenues and profitability; or | |
|
| steel market sanctions, trade embargoes and other
supply chain shocks may adversely impact public and private infrastructure and renewables new construction and maintenance projects, ultimately
slowing Circle 8s strategic transition to diversify its end markets and client base. | |
Furthermore, as Circle 8 expands
its operations, it may need to rely on suppliers and logistics partners in new geographic regions, which could expose the company to additional
supply chain risks.
**Circle 8s reliance on a limited number
of equipment manufacturers exposes the company to significant risks, as the termination or disruption of relationships with any of these
manufacturers could adversely impact Circle 8s ability to obtain equipment in a timely or adequate manner, potentially leading
to operational disruptions and financial losses.**
Circle 8 purchases most of its equipment from a leading, nationally
recognized OEM. For the year ended December 31, 2024, the company acquired two new cranes pursuant to leases with an option to purchase.
Prior thereto, it purchased 100% of its equipment from Manitowoc/Grove, one of the leading worldwide heavy equipment manufacturers. Utilizing
one OEM reduces the number of parts and inventory items kept on hand resulting in savings, while still allowing for efficient and timely
repairs and maintenance of Circle 8s cranes. Circle 8 may diversify its equipment supplier options going forward to diversify its
fleet somewhat. Utilizing a new OEM equipment manufacturer creates risk from requiring an increase in parts inventory and could have an
adverse effect on the business, financial condition or results of operations if the new OEM were unable to supply Circle 8 in an adequate
or timely manner.
**Circle 8 faces risks related to heightened
inflation, recession, financial and credit market disruptions and other economic conditions.**
Circle 8s financial
results, operations and forecasts depend significantly on worldwide economic and geopolitical conditions, the demand for Circle 8s
products, and the financial condition of its customers and suppliers. Economic weakness and geopolitical uncertainty have in the past
resulted, and may result in the future, in reduced demand for lifting solutions resulting in decreased sales, margins and earnings. In
2022 and 2023, the U.S. experienced significantly heightened inflationary pressures which have continued into 2025. It is difficult to
fully mitigate the impact of inflation through price increases passed through to customers that are operating in commodity sector with
global end market pricing mechanisms, productivity initiatives and cost savings, which could have an adverse effect on Circle 8s
financial results and position. In addition, if the U.S. economy enters a recession, Circle 8s sales may decline, which could have
an adverse effect on its overall business, operating results and financial condition. Similarly, disruptions in financial and/or credit
markets may impact Circle 8s ability to manage normal commercial relationships with its customers, suppliers and creditors. Further,
in the event of a recession or threat of a recession, Circle 8s customers and suppliers may suffer their own financial and economic
challenges and as a result they may demand pricing accommodations, delay payment, or become insolvent, which could harm Circle 8s
ability to meet its customer demands or collect revenue or otherwise could harm the business and its ability to service incumbent loans,
ultimately leading to possible insolvency. An economic or credit crisis could occur and impair credit availability and Circle 8s
ability to raise capital as required for ongoing working capital, maintenance capital and expansion capex. A disruption in the financial
markets could impair Circle 8s banking or other business partners, on whom it relies for access to capital. In addition, changes
in tax or interest rates in the U.S. or other nations, whether due to recession, economic disruptions or other reasons, could have an
adverse effect on Circle 8s operating results. Economic weakness and geopolitical uncertainty may also lead to asset impairment,
restructuring actions or adjust Circle 8s operating strategy and reduce expenses in response to decreased sales or margins. Circle
8 may not be able to adequately adjust its cost structure in a timely fashion, which could have an adverse effect on its operating results
and financial condition. Uncertainty about economic conditions may increase foreign currency volatility in markets in which it transacts
business, which could have an adverse effect on Circle 8s operating results.
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**The inability to forecast trends accurately
may have an adverse impact on Circle 8s business and financial condition.**
An economic downturn or economic
uncertainty makes it difficult to forecast trends. For example, the economic uncertainty caused by COVID-19, and its impact on Circle
8s operational and financial performance was highly dependent on the depth and duration of the pandemic, as well as the government-mandated
restrictions on economic activity and government economic stimulus packages passed in response to the economic downturn. More recently,
rising interest rates, higher than expected inflation, and several bank failures also underscore the potential impact of ongoing economic
risks to Circle 8s operations and financial performance. These factors can lead to increased borrowing costs, reduced consumer
spending, and reduced access to credit, among other potential challenges.
This uncertainty makes it
difficult to forecast Circle 8s future operating performance, cash flows and financial position, which could have an adverse impact
on its business and financial condition. Additionally, uncertainty regarding future oil and natural gas prices have negatively impacted
the exploration, production and construction activity of Circle 8s customers in those markets. Uncertainty regarding future lifting
solutions demand could cause Circle 8 to maintain excess equipment inventory and increase its equipment inventory carrying costs, decrease
utilization and cause a technical default in certain covenants. Alternatively, difficulty forecasting, in addition to labor shortages
and supply chain disruptions could cause a shortage incremental rental equipment that could result in an inability to satisfy demand for
Circle 8 service and a loss of market share.
**Circle 8s revenue and operating results
may fluctuate, which could result in a decline in profitability and make it more difficult to grow the business.**
Circle 8s revenue and
operating results have historically varied from month to month and quarter to quarter. Periods of decline could result in an overall decline
in profitability and make it more difficult to adequately service indebtedness and grow the business using incremental leverage. It can
be expected that Circle 8s quarterly results will continue to fluctuate in the future due to a number of factors, including the
following:
|
| general economic conditions in the markets in
which the company operates; | |
|
| the cyclical nature of Circle 8s customers
business, particularly Circle 8s oil services customer and prospective customers in the construction industry; | |
|
| sales patterns in general in the construction
industry, with sales activity tending to be lower in the winter months, which causes significant volatility in utilization; | |
|
| changes in the size of Circle 8s fleet
due to rapid growth followed by a slow-down and Circle 8s ability to service and maintain its fleet in a timely manner; | |
|
| an overcapacity of fleet in the crane services
industry; | |
|
| severe weather and seismic conditions temporarily
affecting the regions in which Circle 8 operates; | |
|
| supply chain or other disruptions that impact
its ability to obtain equipment and other supplies from key suppliers on acceptable terms or at all; | |
|
| changes in corporate spending for plants and
facilities or changes in government spending for infrastructure projects; | |
|
| changes in interest rates and related changes
in Circle 8s interest expense and debt service obligations; or | |
|
| the possible need, from time to time, to record
impairment charges or other write-offs or charges due to a variety of occurrences, such as the impairment of assets, existing location
divestitures, dislocation in the equity and/or credit markets, consolidations or closings, restructurings, or the refinancing of existing
indebtedness. | |
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**Circle 8 is subject to competition, which may
have a material adverse effect on its business by reducing its ability to increase or maintain revenues or profitability.**
The full-service crane services
and lifting solutions industry is highly competitive and fragmented. Many of the markets in which Circle 8 operates are served by numerous
competitors, ranging from global, national and multi-regional equipment rental companies to small, independent businesses with a limited
number of locations. Circle 8 has historically competed on the basis of availability, quality, reliability, delivery and price. Some of
Circle 8s competitors have significantly greater financial, marketing and other resources than it does, and may be able to reduce
rates. Circle 8 may encounter increased competition from existing competitors or new market entrants in the future, which could have a
material adverse effect on its business, financial condition and results of operations.
**The cost of new Circle 8 rental fleet units
may increase and therefore may require a larger equity investment equipment. In some cases, it may not be possible to procure equipment
on a timely basis due to supplier constraints, among other reasons.**
The cost of new equipment
from manufacturers of Circle 8 fleet may increase because of increased raw material costs, including increases in the cost of steel, which
is a primary material used in almost all of the equipment Circle 8 uses, labor shortages, supply chain disruptions or due to increased
regulatory requirements, such as those related to emissions. In addition, in an effort to combat climate change, Circle 8s customers
may require Circle 8s fleet to meet certain standards which may not be able to be met without capital intensive and time-consuming
fleet unit retrofits or ultimately cost prohibitive replacements. If such retrofits or replacements cannot be achieved in a timely manner,
or at all, Circle 8s sales, financial results and financial position would be materially adversely impacted. These increases could
materially impact Circle 8s financial condition or results of operations in future periods if Circle 8 is not able to pass such
cost increases through to its customers.
**Circle 8s fleet is subject to residual
value risk upon disposition.**
The market value of any given
piece of equipment could be less than its depreciated value at the time it is sold. The market value of used rental equipment depends
on several factors, including:
|
| general economic conditions in the markets in
which the company operates; | |
|
| wear and tear on the equipment relative to its
age; | |
|
| the time of year that it is sold (prices are
generally higher during the busy season); | |
|
| worldwide and domestic demands for used equipment; | |
|
| the supply of used equipment on the market; and | |
|
| general economic conditions. | |
Circle 8 typically includes
in operating income the difference between the sales price and the depreciated value of an item of equipment sold. In the year ended December
31, 2023, Circle 8 sold used equipment from its rental fleet, reducing the total number of cranes from 75 to 55, with the average selling
price exceeding the net orderly liquidation value. However, in 2024, Circle 8 slightly increased its fleet size by adding two additional
cranes, bringing the total to 57 cranes. While recent equipment sales have remained favorable, there can be no assurance that used equipment
selling prices will not decline in the future. Any significant downturn in the market for used equipment could have a material adverse
effect on Circle 8s business, financial condition, results of operations, or cash flows.
**As Circle 8s rental fleet ages, its
operating costs may increase, it may be unable to pass along such costs to customers, and earnings may decrease. The costs of new fleet
units may increase, requiring Circle 8 to spend more for replacement equipment or preventing it from procuring equipment on a timely basis.**
If Circle 8s rental
equipment ages, the costs of maintaining such equipment, if not replaced within a certain period of time, will likely increase. The costs
of maintenance may materially increase in the future and could lead to material adverse effects on Circle 8s results of operations.
The cost of new equipment for use in Circle 8s rental fleet could also increase due to increased material costs for its suppliers
(including tariffs on raw materials) or other factors beyond Circle 8s control. Such increases could materially adversely impact
Circle 8s financial condition and results of operations in future periods. Furthermore, changes in customer demand could cause
certain of Circle 8s existing equipment to become obsolete and require Circle 8 to purchase new equipment at increased costs.
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**Labor disputes could disrupt Circle 8s
ability to serve its customers and/or lead to higher labor costs.**
As of December 31, 2024, Circle
8 had approximately 132 employees in Texas, Louisiana and Oklahoma, none of whom is unionized. While Circle 8 has no current plans to
unionize any of its locations, it recognizes the possibility of a branch or group of branches in a state becoming unionized against Circle
8s wishes in the future. However, Circle 8 is committed to maintaining positive and productive relationships with its employees
without union influence, prioritizing open communication and collaboration to address any concerns and ensure a positive work environment.
Any Circle 8 employees
union organizing efforts or collective bargaining negotiations could potentially lead to work stoppages and/or slowdowns or strikes by
certain Circle 8 employees, which could adversely affect its ability to serve its customers.
**Climate change, climate change regulations
and greenhouse effects may materially adversely impact Circle 8 operations and markets.**
Climate change and its association
with greenhouse gas emissions is receiving increased attention from the scientific and political communities. The U.S. federal government,
certain U.S. states and certain other countries and regions have adopted or are considering legislation or regulation imposing overall
caps or taxes on greenhouse gas emissions from certain sectors or facility categories. Such new laws or regulations, or stricter enforcement
of existing laws and regulations, could increase the costs of operating Circle 8s businesses, reduce the demand for its products
and services and impact the prices charged to customers, any or all of which could adversely affect Circle 8s results of operations.
Failure to comply with any legislation or regulations could potentially result in substantial fines, criminal sanctions or operational
changes. Moreover, even without such legislation or regulation, the perspectives of Circle 8s customers, employees and other stakeholders
regarding climate change are continuing to evolve, and increased awareness of, or any adverse publicity regarding, the effects of greenhouse
gases could harm Circle 8s reputation or reduce customer demand for Circle 8s products and services. Additionally, as severe
weather events become increasingly common, Circle 8s and its customers operations may be disrupted, which could result in
increased operational costs or reduced demand for its products and services, which could have an adverse effect on Circle 8s results
of operations. In addition, climate change may also reduce the availability or increase the cost of insurance for weather-related events
and may impact the global economy, including as a result of disruptions to supply chains. Circle 8 anticipates that climate change-related
risks will increase over time.
**Risks Related to Our Bitcoin Operations**
Risks Related to Our Bitcoin Operations General
**Acceptance and/or widespread use of Bitcoin
is uncertain.**
Currently, there is a limited
use of any Bitcoin in the retail and commercial marketplace, thus contributing to price volatility that could adversely affect an investment
in our securities. Banks and other established financial institutions may refuse to process funds for Bitcoin transactions or process
wire transfers to or from Bitcoin exchanges, Bitcoin-related companies or service providers, which we have experienced, or maintain accounts
for persons or entities transacting in Bitcoin. Conversely, a significant portion of Bitcoin demand is generated by investors seeking
a long-term store of value or speculators seeking to profit from the short- or long-term holding of the asset. Price volatility undermines
Bitcoins role as a medium of exchange, as retailers are much less likely to accept it as a form of payment. Market capitalization
for a Bitcoin as a medium of exchange and payment method may always be low.
The relative lack of acceptance
of Bitcoins in the retail and commercial marketplace, or a reduction of such use, limits the ability of end users to use them to pay for
goods and services. Such lack of acceptance or decline in acceptances could have a material adverse effect on our ability to continue
as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or
operations and potentially the value of Bitcoins we mine or otherwise acquire or hold for our own account.
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| | |
**The development and acceptance of cryptographic
and algorithmic protocols governing the issuance of and transactions in cryptocurrencies is subject to a variety of special economic,
geopolitical and regulatory factors, which could slow the growth of the industry in general and our company as a result.**
The use of cryptocurrencies,
including Bitcoin, to, among other things, buy and sell goods and services and complete transactions, is part of a new and rapidly evolving
industry that employs cryptocurrency assets based upon a computer-generatedmathematical and/or cryptographic protocol. Large-scaleacceptance
of cryptocurrencies as a means of payment has not, and may never, occur. The growth of this industry in general, and the use of Bitcoin
in particular, is subject to a high degree of uncertainty, and the slowing or stopping of the development or acceptance of developing
protocols may occur unpredictably. The factors include, but are not limited to:
|
| the progress of worldwide growth in the adoption
and use of Bitcoin and other cryptocurrencies as a medium of exchange; | |
|
| the experience of businesses in using Bitcoin; | |
|
| the impact from prominent business leaders in criticizing Bitcoins
potential harm to the environment and the effect of announcements critical of Bitcoin, such as those made by Elon Musk of Tesla; | |
|
| governmental and organizational regulation of
Bitcoin and other cryptocurrencies and their use, or restrictions on or regulation of access to and operation of the network or similar
cryptocurrency systems (such as the 2021 ban in China); | |
|
| changes in consumer demographics and public tastes
and preferences, including as may result from coverage of Bitcoin or other cryptocurrencies by journalists and other sources of information
and media; | |
|
| the maintenance and development of the open-sourcesoftware
protocol of the network; | |
|
| the increased consolidation of contributors to
the Bitcoin blockchain through mining pools and scaling of mining equipment by well-capitalizedmarket participants; | |
|
| the availability and popularity of other forms
or methods of buying and selling goods and services, including new means of using fiat currencies; | |
|
| the use of the networks supporting Bitcoin or
other cryptocurrencies for developing smart contracts and distributed applications; | |
|
| general economic conditions and the regulatory
environment relating to Bitcoin and other cryptocurrencies; | |
|
| the impact of regulators focusing on cryptocurrencies
and the costs, financial and otherwise, associated with such regulatory oversight; and | |
|
| a decline in the popularity or acceptance of
Bitcoin could adversely affect an investment in us. | |
The outcome of these factors could have
negative effects on our ability to continue as a going concern or to pursue our business strategy, which could have a material adverse
effect on our business, prospects or operations as well as potentially negative effects on the value of any Bitcoin or other cryptocurrencies
we mine or otherwise acquire, which would harm investors in our securities. If Bitcoin does not increase its market acceptance as a mechanism
to buy and sell goods and services or accrete in value over time, our prospects and your investment in us would diminish.
**Political or economic crises may motivate large-scalesales
of cryptocurrencies, which could result in a reduction in values of cryptocurrencies such as Bitcoin and adversely affect an investment
in us.**
Geopolitical crises, in particular
major ones such as Russias invasion of Ukraine and the conflict between Israel and Hamas as well as its supporters, may motivate
large-scale purchases of Bitcoin and other cryptocurrencies, which could increase the price of Bitcoin and other cryptocurrencies rapidly.
This may increase the likelihood of a subsequent price decrease as crisis-driven purchasing behavior dissipates, adversely affecting the
value of our Bitcoin following such downward adjustment. Such risks are similar to the risks of purchasing commodities in general uncertain
times, such as the risk of purchasing, holding or selling gold. Alternatively, as an emerging asset class with limited acceptance as a
payment system or commodity, global crises and general economic downturn may discourage investment in cryptocurrencies as investors focus
their investment on less volatile asset classes as a means of hedging their investment risk.
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| | |
As an alternative to fiat
currencies that are backed by central governments, cryptocurrencies, which are relatively new, are subject to supply and demand forces.
How such supply and demand will be impacted by geopolitical events is largely uncertain but could be harmful to us and investors in our
Class A common stock. Political or economic crises may motivate large-scale acquisitions or sales of cryptocurrencies either globally
or locally. Such events could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy
at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin or
any other cryptocurrencies we mine or otherwise acquire or hold for our own account.
**Negative media attention and public perception
surrounding energy consumption by cryptocurrency mining may adversely affect our reputation and, consequently, our stock price; particularly
in the eyes of some of our investors who may be more interested in our non-crypto operations as a holding company.**
Cryptocurrency mining has
experienced negative media attention surrounding its perceived high electricity use and environmental impact, which has adversely influenced
public perception of the industry as a whole. We believe these factors are overstated for the cryptocurrency mining industry because of
the informational disparity between cryptocurrency mining and other energy intensive industries. Cryptocurrency miners (particularly Bitcoin
miners) have freely and publicly disclosed their energy consumption statistics because electricity usage, and the associated utility fees,
is a cost of production. As increasing numbers of publicly traded cryptocurrency miners enter the market, more data, reliably disclosed
in compliance with generally accepted accounting principles in the United States of America (GAAP), has become available;
however, such data has not been made as readily available for competitive payment systems and fiat currencies.
Nevertheless, this negative
media attention and public perception may materially and adversely affect our reputation and, consequently, our stock price, particularly
in the eyes of our investors who are more interested in our non-crypto operations as a holding company. As a single company within the
broader cryptocurrency industry, we are likely incapable of effectively countering this negative media attention and affecting public
perception. Therefore, we may not be able to adequately respond to these external pressures, which may cause a significant decline in
the price of our Class A common stock.
**Banks and financial institutions may not provide
banking services, or may cut off services, to businesses like us that engage in cryptocurrency-related activities.**
A number of companies that
engage in Bitcoin and/or other cryptocurrency-relatedactivities have been unable to find banks or financial institutions that are
willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated
with cryptocurrencies may have had and may continue to have their existing bank accounts closed or services discontinued with financial
institutions in response to government action. The difficulty that many businesses that provide Bitcoin and/or derivatives on other cryptocurrency-relatedactivities
have and may continue to have in finding banks and financial institutions willing to provide them services may be decreasing the usefulness
of cryptocurrencies as a payment system and harming public perception of cryptocurrencies, and could decrease their usefulness and harm
their public perception in the future.
The usefulness of cryptocurrencies
as a payment system and the public perception of cryptocurrencies could be damaged if banks or financial institutions were to close the
accounts of businesses engaging in Bitcoin and/or other cryptocurrency-relatedactivities. This could occur as a result of compliance
risk, cost, government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national securities
exchanges and derivatives on commodities exchanges, the over-the-countermarket, and the Depository Trust Company (DTC),
which, if any of such entities adopts or implements similar policies, rules or regulations, could negatively affect our relationships
with financial institutions and impede our ability to convert cryptocurrencies to fiat currencies. Such factors could have a material
adverse effect on our ability to continue as a going concern or to monetize our mining efforts, which could have a material adverse effect
on our business, prospects or operations and harm investors.
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**The price of cryptocurrencies may be affected
by the sale of such cryptocurrencies by other vehicles investing in cryptocurrencies or tracking cryptocurrency markets. Such events could
have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin we mine.**
The global market for cryptocurrency is characterized by supply constraints
that differ from those present in the markets for commodities or other assets such as gold and silver. The mathematical protocols under
which certain cryptocurrencies are mined permit the creation of a limited, predetermined amount of digital currency, while others have
no limit established on total supply. Increased numbers of miners and deployed mining power globally will likely continue to increase
the available supply of Bitcoin and other cryptocurrencies, which may depress their market price. Further, large block sales
involving significant numbers of Bitcoin following appreciation in the market price of Bitcoin may also increase the supply of Bitcoin
available on the market, which, without a corresponding increase in customer demand, may cause its price to fall. Currently, the loss
of customer demand is also accentuated by disruptions in the crypto assets market. Additionally, to the extent that other vehicles investing
in cryptocurrencies or tracking cryptocurrency markets form and come to represent a significant proportion of the customer demand for
cryptocurrencies, including the recent approval of Bitcoin exchange traded funds, large redemptions of the securities of those vehicles
and the subsequent sale of cryptocurrencies by such vehicles could negatively affect cryptocurrency prices and therefore affect the value
of the cryptocurrency inventory we hold. Such events could have a material adverse effect on our business, prospects or operations and
potentially the value of any Bitcoin.
Risks Related to Our Bitcoin Operations Operational and
Financial
**Risk related to technological advancements
and obsolescence of current bitcoin mining equipment.**
Our operations are exposed
to the risk of rapid technological advancements in the development and production of Bitcoin mining equipment, which could render our
existing mining infrastructure obsolete and adversely impact our financial performance.
The Bitcoin mining industry
is characterized by rapid technological change, with companies continually developing and deploying new mining equipment and techniques
to enhance computational efficiency and reduce energy consumption. These advancements may outpace our ability to adapt, maintain, and
upgrade our mining equipment, thereby negatively affecting our competitive position and operational efficiency. As a result, we may be
required to make significant capital investments to acquire and implement new technology to maintain our competitiveness.
If we are unable to anticipate
or adapt to such advancements, or if we fail to allocate our resources efficiently, we may be forced to rely on outdated equipment that
becomes increasingly inefficient and expensive to maintain. Moreover, the emergence of more advanced mining technologies could lead to
an increase in the overall mining difficulty, further reducing the effectiveness of our existing equipment and diminishing our mining
rewards.
Additionally, there is a risk
that our competitors, who may have greater financial resources and flexibility, will be better positioned to adopt emerging technologies
and gain a competitive advantage. This could result in a decline in our market share, revenue, and profitability.
Inability to manage these
risks could have a material adverse effect on our business, financial condition, and operating results.
**Our future success will depend in part upon
the value of Bitcoin. The value of Bitcoin may be subject to pricing risk and has historically been subject to wide swings.**
Our operating results from
this sector will depend in part upon the value of Bitcoin because it is the sole digital asset we currently mine. Specifically, our revenues
from our Bitcoin mining operations are principally based upon two factors: the number of Bitcoin rewards we successfully mine and the
value of Bitcoin. We also receive transaction fees paid in Bitcoin by participants who initiated transactions associated with new blocks
that we mine. Our strategy currently focuses primarily on Bitcoin (as opposed to other digital assets). Further, our miners are principally
utilized for mining Bitcoin and cannot mine other digital assets that are not mined utilizing the SHA-256 algorithm. If
other digital assets were to achieve acceptance at the expense of Bitcoin, causing the value of Bitcoin to decline, or if Bitcoin were
to switch its proof of work algorithm from SHA-256 to another algorithm for which our miners are not specialized, or the value of Bitcoin
were to decline for other reasons, particularly if such decline were significant or over an extended period of time, our operating results
would be adversely affected, and there could be a material adverse effect on our ability to continue as a going concern or to pursue our
business strategy at all, which could have a material adverse effect on our business, prospects or operations, and harm investors.
Bitcoin and other cryptocurrency
market prices, which have historically been volatile and are impacted by a variety of factors are determined primarily using data from
various exchanges, over-the-counter markets and derivative platforms. Such prices may be subject to factors such as those that impact
commodities, more so than business activities, which could be subject to additional influence from fraudulent or illegitimate actors,
real or perceived scarcity, and political, economic, regulatory or other conditions. Pricing may be the result of, and may continue to
result in, speculation regarding future appreciation in the value of digital assets, or our share price, inflating and making their market
prices more volatile or creating bubble type risks for both Bitcoin and our shares of Class A common stock.
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**We may be unable to raise additional capital needed to grow our
data center hosting business.**
We have operated and expect
to continue to operate at a loss as we continue to establish our business model and as Bitcoin prices continue to experience significant
volatility. In addition, we expect to need to raise additional capital to fund our working capital requirements, expand our operations,
pursue our growth strategy and to respond to competitive pressures or working capital requirements. Specifically, the expansion of our
Michigan Property to potentially 340 MWs of power will require significant capital. We may not be able to obtain additional debt or equity
financing on favorable terms, if at all, which could impair our growth and adversely affect our existing operations. The global economy,
including credit and financial markets, has recently experienced extreme volatility and disruptions, including diminished credit availability,
rising interest and inflation rates, declines in consumer confidence, declines in economic growth, increases in unemployment rates and
uncertainty about economic stability. Such macroeconomic conditions could also make it more difficult for us to incur additional debt
or obtain equity financing. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership
interests, and the per share value of our Class A common stock could decline. Further, if we engage in additional debt financing, the
holders of debt likely would have priority over the holders of our Class A common stock on order of payment preference. We may be required
to accept terms that restrict our ability to incur additional indebtedness, take other actions including accepting terms that require
us to maintain specified liquidity or other ratios that could otherwise not be in the interests of our stockholders. Increased credit
pressures on the cryptocurrency industry, such as banks, investors and other companies reducing or eliminating their exposure to the cryptocurrency
industry through lending, have had and may continue to have a material impact on our business. In light of conditions impacting our industry,
it may be more difficult for us to obtain equity or debt financing in the future.
**The emergence of competing blockchain platforms
or technologies may harm our business as presently conducted by preventing us from realizing the anticipated profits from our investments
and forcing us to expend additional capital in an effort to adapt.**
If blockchain platforms or
technologies which compete with Bitcoin and its blockchain, including competing cryptocurrencies which our miners may not be able to mine,
such as cryptocurrencies being developed or that may be developed by popular social media platforms, online retailers, or government sponsored
cryptocurrencies, consumers may use such alternative platforms or technologies. If that were to occur, we would face difficulty adapting
to such emergent digital ledgers, blockchains, or alternative platforms, cryptocurrencies or other digital assets. This may adversely
affect us by preventing us from realizing the anticipated profits from our investments and forcing us to expend additional capital in
an effort to adapt. Further, to the extent we cannot adapt, be it due to our specialized miners or otherwise, we could be forced to cease
our mining or other cryptocurrency-relatedoperations. Such circumstances would have a material adverse effect on our business, and
in turn your investment in our securities.
**We rely on one or more third parties for depositing,
storing and withdrawing the Bitcoin we receive, which could result in a loss of assets, disputes and other liabilities or risks which
could adversely impact our business.**
We currently use a custodial
wallet to store the Bitcoin we receive. In order to own, transfer and use Bitcoin on the blockchain network, we must have a private and
public key pair associated with a network address, commonly referred to as a wallet. Each wallet is associated with a unique
public key and private key pair, each of which is a string of alphanumerical characters. To deposit Bitcoin
into our digital wallet, we must direct the transaction to the public key of a wallet that our Gemini custodial account controls and provides
to us, and broadcast the deposit transaction onto the underlying blockchain network. To withdraw Bitcoin from our custodial account, an
assigned account representative must initiate the transaction from our custodial account, then an approver must approve the transaction.
Once the custodian has verified that the request is valid and who the recipient is through Know Your Customer/Anti-Money Laundering protocols,
the custodian then signs a transaction authorizing the transfer. In addition, some cryptocurrency networks require additional
information to be provided in connection with any transfer of cryptocurrency such as Bitcoin.
A number of errors or other
adverse events can occur in the process of depositing, storing or withdrawing Bitcoin into or from our custodial account, such as typos,
mistakes or the failure to include the information required by the blockchain network. For instance, a user may incorrectly enter our
wallets public key or the desired recipients public key when depositing and withdrawing Bitcoin. Additionally, our reliance
on third parties such as Gemini and the maintenance of keys to access and utilize our digital wallet will expose us to enhanced cybersecurity
risks from unauthorized third parties employing illicit operations such as hacking, phishing and social engineering, notwithstanding the
security systems and safeguards employed by us and others. Cyberattacks upon systems across a variety of industries, including the cryptocurrency
industry, are increasing in frequency, persistence and sophistication and, in many cases, are being conducted by sophisticated, well-funded,
and organized groups and individuals. For example, attacks may be designed to deceive employees and service providers into releasing control
of the systems on which we depend to a hacker, while others may aim to introduce computer viruses or malware into such systems with a
view to stealing confidential or proprietary data. These attacks may occur on our digital wallet or the systems of our third-partyservice
providers or partners, which could result in asset losses and other adverse consequences. Insurance held by third parties may not cover
related losses. Alternatively, we may inadvertently transfer Bitcoin to a wallet address that we do not own, control or hold the private
keys to. In addition, a Bitcoin wallet address can only be used to send and receive Bitcoin, and if the Bitcoin is inadvertently sent
to an Ethereum or other cryptocurrency wallet address, or if any of the foregoing errors occur, all of the Bitcoin will be permanently
and irretrievably lost with no means of recovery. Such incidents could result in asset loss or disputes, any of which could materially
and adversely affect our business.
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**If a malicious actor or botnet obtains control
of more than 50% of the processing power on a cryptocurrency network, such actor or botnet could manipulate blockchains to adversely affect
us, which would adversely affect an investment in our company and our ability to operate.**
If a malicious actor or botnet
(a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority
of the processing power dedicated to mining a cryptocurrency, it may be able to alter blockchains on which transactions of cryptocurrency
reside and rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner, or at all. The
malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new units or transactions
using such control. The malicious actor could double-spend its own cryptocurrency (i.e., spend the same Bitcoin in more
than one transaction) and prevent the confirmation of other users transactions for as long as it maintained control. To the extent
that such malicious actor or botnet does not yield its control of the processing power on the network or the cryptocurrency community
does not reject the fraudulent blocks as malicious, reversing any changes made to blockchains may not be possible. The foregoing description
is not the only means by which the entirety of blockchains or cryptocurrencies may be compromised but is only an example.
Although we are unaware of
any reports of malicious activity or control of blockchains achieved through controlling over 50% of the processing power on the network,
it is believed that certain mining pools may have exceeded the 50% threshold in Bitcoin. The possible crossing of the 50% threshold indicates
a greater risk that a single mining pool could exert authority over the validation of Bitcoin transactions. To the extent that the Bitcoin
community, and the administrators of mining pools, do not act to ensure greater decentralization of Bitcoin mining processing power, the
feasibility of a botnet or malicious actor obtaining control of the blockchains processing power will increase, because such botnet
or malicious actor could more readily infiltrate and seize control over the blockchain by compromising a single mining pool, if the mining
pool compromises more than 50% of the mining power on the blockchain, than it could if the mining pool had a smaller share of the blockchains
total hashing power. Conversely, if the blockchain remains decentralized it is inherently more difficult for the botnet or malicious actor
to aggregate enough processing power to gain control of the blockchain. If this were to occur, the public may lose confidence in the Bitcoin
blockchain, and blockchain technology more generally. This would likely have a material and adverse effect on the price of Bitcoin, which
could have a material adverse effect on our business, financial results and operations, and harm investors.
**Our reliance on a
third-party mining pool service provider for our mining revenue payouts may have a negative impact on our operations such as a result
of cyber-attacks against the mining pool operator and/or our limited recourse against the mining pool operator with respect to rewards
paid to us.**
We
receive crypto asset mining rewards from our mining activity through a third-party mining pool operator. Mining pools allow miners to
combine their processing power, increasing their chances of solving a block and getting paid by the network. The rewards are distributed
by the pool operator, proportionally to our contribution to the pools overall mining power, used to generate each block. Should
the pool operators system suffer downtime due to a cyber-attack, software malfunction or other similar issues, it will negatively
impact our ability to mine and receive revenue. Furthermore, we are dependent on the accuracy of the mining pool operators record
keeping to accurately record the total processing power provided to the pool for a given Bitcoin mining application in order to assess
the proportion of that total processing power we provided.
While
we have internal methods of tracking both our power provided and the total used by the pool, the mining pool operator uses its own recordkeeping
to determine our proportion of a given reward. We have little means of recourse against the mining pool operator if we determine the proportion
of the reward paid out to us by the mining pool operator is incorrect, other than leaving the pool. If we are unable to consistently obtain
accurate proportionate rewards from our mining pool operators, we may experience reduced reward for our efforts, which would have an adverse
effect on our business and operations.
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**Bitcoin may have concentrated ownership and large sales or distributions by holders of Bitcoin assets could have
an adverse effect on the market price of Bitcoin.**
As of April 9, 2025, the largest 93 and 2,094 Bitcoin wallets held
approximately 15% and 38%, respectively, of the Bitcoin in circulation. Moreover, it is possible that other persons or entities control
multiple wallets that collectively hold a significant number of Bitcoins, even if they individually only hold a small amount, and it is
possible that some of these wallets are controlled by the same person or entity. As a result of this concentration of ownership, large
sales or distributions by such holders could have an adverse effect on the market price of Bitcoin.
Risks Related to Our Bitcoin Operations Legal and Regulatory
**We are subject to a highly evolving regulatory landscape and any
adverse changes to, or our failure to comply with, any laws and regulations could adversely affect our business, prospects or operations.**
Our business is subject to
extensive laws, rules, regulations, policies and legal and regulatory guidance, including those governing securities, commodities, crypto
asset custody, exchange and transfer, data governance, data protection, cybersecurity and tax. Many of these legal and regulatory regimes
were adopted prior to the advent of the Internet, mobile technologies, crypto assets and related technologies. As a result, they do not
contemplate or address unique issues associated with the crypto economy, are subject to significant uncertainty, and vary widely across
U.S. federal, state and local and international jurisdictions. These legal and regulatory regimes, including the laws, rules and regulations
thereunder, evolve frequently and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another,
and may conflict with one another. Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding
the regulation of the crypto economy requires us to exercise our judgement as to whether certain laws, rules and regulations apply to
us, and it is possible that governmental bodies and regulators may disagree with our conclusions. To the extent we have not complied with
such laws, rules and regulations, we could be subject to significant fines and other regulatory consequences, which could adversely affect
our business, prospects or operations. As Bitcoin has grown in popularity and in market size, the Federal Reserve Board, U.S. Congress
and certain U.S. agencies (e.g., the CFTC, SEC, FinCEN and the FBI) have begun to examine the operations of the Bitcoin network, Bitcoin
users and the Bitcoin exchange market. Regulatory developments and/or our business activities may require us to comply with certain regulatory
regimes. For example, to the extent that our activities cause us to be deemed a money service business under the regulations promulgated
by FinCEN under the authority of the BSA, we may be required to comply with FinCEN regulations, including those that would mandate us
to implement certain anti-money laundering programs, make certain reports to FinCEN and maintain certain records.
On November 23, 2022, the
governor of New York signed into law a two-year moratorium on new or renewed permits for certain electricity-generating facilities that
use fossil fuel and provide energy for proof-of-work digital asset mining operations. While this action does not directly impact our current
operations, as our power generation plans are currently located in Michigan and we have no plans to establish any facilities in New York,
it may be the beginning of a new wave of climate change regulations aimed at preventing or reducing the growth of Bitcoin mining in jurisdictions
in the United States, including potentially jurisdictions in which we now operate or may in the future operate. The above-described developments
could also demonstrate the beginning of a regional or global regulatory trend in response to environmental and energy preservation or
other concerns surrounding crypto assets, and similar action in a jurisdiction in which we operate or in general could have a devastating
effect on our operations. If further regulation follows, it is possible that the Bitcoin mining industry may not be able to adjust to
a sudden and dramatic overhaul to our ability to deploy energy towards the operation of mining equipment. We are not currently aware of
any legislation in Michigan being a near-term possibility. If further regulatory action is taken by various governmental entities, our
business may suffer and investors in our securities may lose part or all of their investment.
We cannot quantify the effects
of this regulatory action on our industry as a whole. If further regulation follows, it is possible that our industry may not be able
to cope with the sudden and extreme loss of mining power. Because we are unable to influence or predict future regulatory actions taken
by governments in China, the United States, or elsewhere, we may have little opportunity or ability to respond to rapidly evolving regulatory
positions which may have a materially adverse effect on our industry and, therefore, our business and results of operations.
Ongoing and future regulatory actions may impact
our ability to continue to operate, and such actions could affect our ability to continue as a going concern or to pursue our strategy
at all, which could have a material adverse effect on our business, prospects or operations.
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**A particular digital assets status as
a security in any relevant jurisdiction is subject to a high degree of uncertainty and if a regulator disagrees with our
characterization of a digital asset, we may be subject to regulatory scrutiny, investigations, fines, and penalties, which may adversely
affect our business, operating results and financial condition. Furthermore, a determination that Bitcoin or any other digital asset that
we own or mine is a security may adversely affect the value of Bitcoin and our business.**
The SEC and its staff have taken the position that certain digital
assets fall within the definition of a security under the U.S. federal securities laws. The legal test for determining whether
any given digital asset is a security, as described below, is a highly complex, fact-driven analysis that may evolve over time, and the
outcome is difficult to predict. Our determination that the digital assets we hold are not securities is a risk-based assessment and not
a legal standard or one binding on regulators. The SEC generally does not provide advance guidance or confirmation on the status of any
particular digital asset as a security. Furthermore, the SECs views in this area have evolved over time and it is difficult to
predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration or the
appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. Public statements made by senior officials
at the SEC indicate that the SEC does not intend to take the position that Bitcoin is a security (as currently offered and sold). However,
such statements are not official policy statements by the SEC and reflect only the speakers views, which are not binding on the
SEC or any other agency or court and cannot be generalized to any other digital asset. As of the date of this Annual Report, with the
exception of certain centrally issued digital assets that have received no-action letters from the SEC staff, Bitcoin and
Ethereum are the only digital assets which senior officials at the SEC have publicly stated are unlikely to be considered securities.
As a Bitcoin mining company, we do not believe we are an issuer of any securities as defined under the federal securities
laws. Our internal process for determining whether the digital assets we hold or plan to hold is based upon the public statements of the
SEC and existing case law. The digital assets we hold or plan to hold, other than Bitcoin (if any), may have been created by an issuer
as an investment contract under the Howey test,*SEC v. Howey Co*., 328 U.S. 293 (1946), and may be deemed to be securities
by the SEC. However, the Company was not the issuer that created these digital assets and is holding them on an interim basis until liquidated.
Should the SEC state that Bitcoin should be deemed to be a security, we may no longer be able to hold any Bitcoin. It will then likely
become difficult or impossible for such digital asset to be traded, cleared or custodied in the United States through the same channels
used by non-security digital assets, which in addition to materially and adversely affecting the trading value of the digital asset is
likely to cause substantial volatility and significantly impact its liquidity and market participants ability to convert the digital
asset into U.S. dollars. Our inability to exchange Bitcoin for fiat or other digital assets (and vice versa) to administer our treasury
management objectives may decrease our earnings potential and have an adverse impact on our business and financial condition.
Under the Investment Company
Act, a company may fall within the definition of an investment company under section 3(c)(1)(A) thereof if it is or holds itself out as
being engaged primarily, or proposes to engage primarily in the business of investing, reinvesting or trading in securities, or under
section 3(a)(1)(C) thereof if it is engaged or proposes to engage in business of investing, reinvesting, owning, holding, or trading in
securities, and owns or proposes to acquire investment securities (as defined therein) having a value exceeding 40% of its
total assets (exclusive of government securities and cash items) on an unconsolidated basis. There is no authoritative law, rule or binding
guidance published by the SEC regarding the status of digital assets as securities or investment securities
under the Investment Company Act. Although we believe that we are not engaged in the business of investing, reinvesting, or trading in
investment securities, and we do not hold ourselves out as being primarily engaged, or proposing to engage primarily, in the business
of investing, reinvesting or trading in securities, to the extent the digital assets which we mine, own, or otherwise acquire may be deemed
securities or investment securities by the SEC or a court of competent jurisdiction, we may meet the definition
of an investment company. If we fall within the definition of an investment company under the Investment Company Act, we would be required
to register with the SEC. If an investment company fails to register, it likely would have to stop doing almost all business, and its
contracts would become voidable. Generally speaking, non-U.S. issuers may not register as an investment company without an SEC order.
**If the SEC or another regulatory body considers
Bitcoin to be a security under U.S. securities laws, we may be required to comply with significant SEC registration and/or other requirements.**
In general, novel or unique
assets such as Bitcoin and other digital assets may be classified as securities if they meet the definition of investment contracts under
U.S. law. In recent years, the offer and sale of digital assets other than Bitcoin, most notably Kik Interactive Inc.s Kin tokens
and Telegram Group Inc.s TON tokens, have been deemed to be investment contracts by the SEC. While we believe that Bitcoin is unlikely
to be considered an investment contract, and thus a security under the investment contract definition, we cannot provide any assurances
that digital assets that we mine or otherwise acquire or hold for our own account, including Bitcoin, will never be classified as securities
under U.S. law. This would obligate us to comply with registration and other requirements by the SEC and, therefore, cause us to incur
significant, non-recurring expenses, thereby materially and adversely impacting an investment in the Company.
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Several foreign jurisdictions have taken a broad-based approach to
classifying crypto assets as securities, while other foreign jurisdictions, such as Switzerland, Malta, and Singapore, have
adopted a narrower approach. As a result, certain crypto assets may be deemed to be a security under the laws of some jurisdictions
but not others. Various foreign jurisdictions may, in the future, adopt additional laws, regulations, or directives that affect the characterization
of crypto assets as securities. If Bitcoin is deemed to be a security under any U.S. federal, state, or foreign jurisdiction,
or in a proceeding in a court of law or otherwise, it may have adverse consequences for Bitcoin. For instance, all transactions in Bitcoin
would have to be registered with the SEC or other foreign authority, or conducted in accordance with an exemption from registration, which
could severely limit its liquidity, usability and transactability. Moreover, the networks on which such Bitcoin is utilized may be required
to be regulated as securities intermediaries, and subject to applicable rules, which could effectively render the network impracticable
for its existing purposes. Further, it could draw negative publicity and a decline in the general acceptance of Bitcoin.
**Current interpretations require the regulation
of Bitcoin under the Commodity ExchangeAct by the Commodity Futures Trading Commission, and we may be required to register and comply
with such regulations. Any disruption of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous
to our investors.**
Current and future legislation,
regulation by the Commodity Futures Trading Commission (the CFTC) and other regulatory developments, including interpretations
released by a regulatory authority, may impact the manner in which Bitcoin and other cryptocurrencies are treated for classification and
clearing purposes. In particular, derivatives on these assets are not excluded from the definition of commodity future by
the CFTC.We cannot be certain as to how future regulatory developments will impact the treatment of Bitcoin and other cryptocurrencies
under the law.
Bitcoin has been deemed to fall within the definition of a commodity,
and we may be required to register and comply with additional regulation under the Commodity ExchangeAct, including additional periodic
report and disclosure standards and requirements. Moreover, we may be required to register as a commodity pool operator and to register
as a commodity pool with the CFTC through the National Futures Association. Such additional registrations may result in extraordinary,
non-recurringexpenses, thereby materially and adversely impacting an investment in us. If we determine not to comply with such additional
regulatory and registration requirements, we may seek to cease certain of our operations. Any such action may adversely affect an investment
in us.
Additionally, governments
may develop and deploy their own blockchain-baseddigital assets, which may have a material adverse impact on Bitcoins price
and utility.
**We are subject to risks associated with our
need for significant electrical power. Government regulators may potentially restrict the ability of electricity suppliers to provide
electricity to mining operations, such as ours.**
The operation of a Bitcoin
mining center, as well as AI hyperscale data centers, can require massive amounts of electrical power. We presently have access to approximately
30 MWs of capacity at our Michigan Facility, which we plan to dedicate to our AI hyperscale data center operations, and 10 MWs of capacity
at our Montana Facilities for our mining operations. However, we require additional capacity to operate all of our miners outside the
Michigan Facility and Montana Facilities and to support the growing power demands of our AI hyperscale data centers. Our mining operations
can only be successful and ultimately profitable if the costs, including electrical power costs, associated with mining a Bitcoin are
lower than the price of a Bitcoin. Similarly, our AI hyperscale data centers require a reliable and cost-effective power supply to ensure
optimal performance and profitability. As a result, any facilities we establish can only be successful if we can obtain sufficient electrical
power on a cost-effective basis. The establishment of new mining and AI hyperscale data centers requires us to find locations where this
is the case. There may be significant competition for suitable locations for both mining operations and AI hyperscale data centers. Government
regulators may potentially restrict the ability of electricity suppliers to provide electricity to these operations in times of electricity
shortage or may otherwise potentially restrict or prohibit the provision of electricity to such operations. Any shortage of electricity
supply or increase in electricity cost in a jurisdiction may negatively impact the viability and the expected economic return for our
Bitcoin mining activities and AI hyperscale data center operations in that jurisdiction.
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**Our interactions with a blockchain may expose
us to specially designated nationals or blocked persons or cause us to violate provisions of law that did not contemplate distributed
ledger technology.**
The Office of Financial Assets Control of the U.S. Department of Treasury
(OFAC) requires us to comply with its sanction program and not conduct business with persons named on its list of specially
designated nationals (SDN). However, because of the pseudonymous nature of blockchain transactions, we may inadvertently
and without our knowledge engage in transactions with persons named on OFACs SDN list. Our internal policies prohibit any transactions
with such SDN individuals, but we may not be adequately capable of determining the ultimate identity of the individual with whom we transact
with respect to selling digital assets. In addition, in the future OFAC or another regulator may require us to screen transactions for
OFAC addresses or other bad actors before including such transactions in a block, which may increase our compliance costs, decrease our
anticipated transaction fees and lead to decreased traffic on our network. Any of these factors, consequently, could have a material adverse
effect on our business, prospects, financial condition, and operating results.
Moreover, federal law prohibits any U.S. person from knowingly or unknowingly
possessing any visual depiction commonly known as child pornography. Recent media reports have suggested that persons have embedded such
depictions on one or more blockchains. Because our business requires us to download and retain one or more blockchains to effectuate our
ongoing business, it is possible that such digital ledgers contain prohibited depictions without our knowledge or consent. To the extent
government enforcement authorities literally enforce these and other laws and regulations that are impacted by decentralized distributed
ledger technology, we may be subject to investigation, administrative or court proceedings, and civil or criminal monetary fines and penalties,
all of which could harm our reputation and could have a material adverse effect on our business, prospects, financial condition, and operating
results.
Risks Related to Our Bitcoin Operations Technological
**The characteristics of crypto assets have been,
and may in the future continue to be, exploited to facilitate illegal activity such as fraud, money laundering, tax evasion and ransomware
scams; if any of our customers do so or are alleged to have done so, it could adversely affect us.**
Digital currencies and the
digital currency industry are relatively new and, in many cases, lightly regulated or largely unregulated. Some types of digital currency
have characteristics, such as the speed with which digital currency transactions can be conducted, the ability to conduct transactions
without the involvement of regulated intermediaries, the ability to engage in transactions across multiple jurisdictions, the irreversible
nature of certain digital currency transactions and encryption technology that anonymizes these transactions, that make digital currency
particularly susceptible to use in illegal activity such as fraud, money laundering, tax evasion and ransomware scams. Two prominent examples
of marketplaces that accepted digital currency payments for illegal activities include Silk Road, an online marketplace on the dark web
that, among other things, facilitated the sale of illegal drugs and forged legal documents using digital currencies and AlphaBay, another
darknet market that utilized digital currencies to hide the locations of its servers and identities of its users. Both of these marketplaces
were investigated and closed by U.S. law enforcement authorities. U.S. regulators, including the SEC, CFTC and Federal Trade Commission,
as well as non-U.S. regulators, have taken legal action against persons alleged to be engaged in Ponzi schemes and other fraudulent schemes
involving digital currencies. In addition, the FBI has noted the increasing use of digital currency in various ransomware scams.
While our board and management
believe that our risk management processes and policies in light of current crypto asset market conditions, which include thorough reviews
we conduct as part of our due diligence process, is reasonably designed to detect any such illicit activities conducted by our potential
or existing counterparties, we cannot ensure that we will be able to detect any such illegal activity in all instances. Because the speed,
irreversibility and anonymity of certain digital currency transactions make them more difficult to track, fraudulent transactions may
be more likely to occur. We or our potential banking counterparties may be specifically targeted by individuals seeking to conduct fraudulent
transfers, and it may be difficult or impossible for us to detect and avoid such transactions in certain circumstances. If one of our
customers (or in the case of digital currency exchanges, their customers) were to engage in or be accused of engaging in illegal activities
using digital currency, we could be subject to various fines and sanctions, including limitations on our activities, which could also
cause reputational damage and adversely affect our business, financial condition and results of operations.
**Incorrect or fraudulent cryptocurrency transactions
may be irreversible and it is possible that, through computer or human error, or through theft or criminal action, our cryptocurrency
rewards could be transferred in incorrect amounts or to unauthorized third parties.**
Cryptocurrency transactions are irrevocable and stolen or incorrectly
transferred cryptocurrencies may be irretrievable. As a result, any incorrectly executed or fraudulent cryptocurrency transactions, such
as a result of a cybersecurity breach against our Bitcoin holdings, could adversely affect our investments and assets. This is because
cryptocurrency transactions are not, from an administrative perspective, reversible without the consent and active participation of the
recipient of the cryptocurrencies from the transaction. Once a transaction has been verified and recorded in a block that is added to
a blockchain, an incorrect transfer of a cryptocurrency or a theft thereof generally will not be reversible and we may not have sufficient
recourse to recover our losses from any such transfer or theft. Further, it is possible that, through computer or human error, or through
theft or criminal action, our cryptocurrency rewards could be transferred in incorrect amounts or to unauthorized third parties, or to
uncontrolled accounts. If an errant or fraudulent transaction in our Bitcoin were to occur, we would have very limited means of seeking
to reverse the transaction or seeking recourse. To the extent that we are unable to recover our losses from such action, error or theft,
such events could have a material adverse effect on our business.
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**Cryptocurrencies, including those maintained
by or for us, may be exposed to cybersecurity threats and hacks.**
As with any computer code
generally, flaws in crypto asset codes, including Bitcoin codes, may be exposed by malicious actors. Several errors and defects have been
found previously, including those that disabled some functionality for users and exposed users information. Exploitation of flaws
in the source code that allow malicious actors to take or create money have previously occurred. Additionally, as AI capabilities improve
and are increasingly adopted, we may see cyberattacks created through AI. These attacks could be crafted with an AI tool to directly attack
information systems with increased speed and/or efficiency than a human threat actor or create more effective phishing emails. Despite
our efforts and processes to prevent breaches, our devices, as well as our miners, computer systems and those of third parties that we
use in our operations, are vulnerable to cyber security risks, including cyber-attacks such as viruses and worms, phishing attacks, denial-of-service
attacks, physical or electronic break-ins, employee theft or misuse, and similar disruptions from unauthorized tampering with our miners
and computer systems or those of third parties that we use in our operations. As technological change occurs, the security threats to
our cryptocurrencies will likely change and previously unknown threats may emerge. Human error and the constantly evolving state of cybercrime
and hacking techniques may render present security protocols and procedures ineffective in ways which we cannot predict. Such events could
have a material adverse effect on our ability to continue as a going concern or to pursue our strategy at all, which could have a material
adverse effect on our business, prospects or operations and potentially the value of any Bitcoin we mine or otherwise acquire or hold
for our own account.
**Our use of third-party
mining pools exposes us to additional risks.**
We receive Bitcoin rewards from our mining activity through third-party
mining pool operators. Mining pools allow miners to combine their processing power, increasing their chances of solving a block and getting
paid by the network. The rewards are distributed by the pool operator, proportionally to our contribution to the pools overall
mining power used to solve a block on the Bitcoin blockchain. Should the pool operators system suffer downtime due to a cyber-attack,
software malfunction or other issue, it will negatively impact our ability to mine and receive revenue. Furthermore, we are dependent
on the accuracy of the mining pool operators record keeping to accurately record the total processing power provided to the pool
for a given Bitcoin mining application in order to assess the proportion of that total processing power we provided. While we have internal
methods of tracking both the hash rate we provide and the total used by the pool, the mining pool operator uses its own record-keeping
to determine our proportion of a given reward, which may not match our own. If we are unable to consistently obtain accurate proportionate
rewards from our mining pool operators, we may experience reduced rewards for our efforts, which would have an adverse effect on our business
and operations.
**Risks Related to Our Status as a Holding
Company**
**Our inability to successfully integrate new
acquisitions could adversely affect our combined business; our operations are widely disbursed.**
Our growth strategy
through acquisitions is fraught with risk. Since 2017, we have acquired the Michigan Facility, a majority interest in TurnOnGreen, the
four hotel properties in and around Madison, Wisconsin, substantially all the assets and certain specified liabilities of Circle 8 Crane
Service and a position in ROI that we consolidate as a VIE. We also acquired all or majority interests in other companies and a certain
real property located in St. Petersburg, Florida, all of which we either sold off or are currently no longer consolidated as a result
of bankruptcy. Our strategy and business plan are dependent on our ability to successfully integrate acquisitions. In addition, while
we are based in Las Vegas, NV, our finance and legal departments are located elsewhere in the U.S., and certain subsidiarys operations
are located across the U.S. and internationally. These distant locations and others that we may become involved with in the future will
stretch our resources and management time. Further, failure to quickly and adequately integrate all of these operations and personnel
could adversely affect our combined business and our ability to achieve our objectives and strategy. No assurance can be given that we
will realize synergies in the areas we currently operate.
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**If we make any additional acquisitions, they may disrupt or have
a negative impact on our business.**
We have plans to eventually
make additional acquisitions.Whenever we make acquisitions, we could have difficulty integrating the acquired companies personnel
and operations with our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict
the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations
could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described
above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
|
| If senior management and/or management of future
acquired companies terminate their employment prior to our completion of integration; | |
|
| difficulty of integrating acquired products,
services or operations; | |
|
| integration of new employees and management into
our culture while maintaining focus on operating efficiently and providing consistent, high-quality goods and services; | |
|
| potential disruption of the ongoing businesses
and distraction of our management and the management of acquired companies; | |
|
| unanticipated issues with transferring customer
relationships; | |
|
| complexity associated with managing our combined
company; | |
|
| difficulty of incorporating acquired rights or
products into our existing business; | |
|
| difficulties in disposing of the excess or idle
facilities of an acquired company or business and expenses in maintaining such facilities; | |
|
| difficulties in maintaining uniform standards,
controls, procedures and policies; | |
|
| potential impairment of relationships with employees
and customers as a result of any integration of new management personnel; | |
|
| potential inability or failure to achieve additional
sales and enhance our customer base through cross-marketing of the products to new and existing customers; | |
|
| effect of any government regulations which relate
to the business acquired; and | |
|
| potential unknown liabilities associated with
acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales
of acquired products or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior
to our acquisition. | |
Our business could be severely
impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection
with these acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business, distract
our management and employees, increase our expenses and adversely affect our results of operations.
**We may not be able to successfully identify
suitable acquisition targets and complete acquisitions to meet our growth strategy, and even if we are able to do so, we may not realize
the full anticipated benefits of such acquisitions, and our business, financial conditions and results of operations may suffer.**
Increasing revenues through
acquisitions is one of the key components of our growth strategy. Identifying suitable acquisition candidates can be difficult, time-consuming
and costly, and we may not be able to identify suitable candidates or complete acquisitions in a timely manner, on a cost-effective basis
or at all.
We will have to pay cash,
incur debt, or issue equity as consideration in any future acquisitions, each of which could adversely affect our financial condition
or the market price of our Class A common stock. The sale of equity or issuance of equity-linked debt to finance any future acquisitions
could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could limit
our flexibility in managing our business due to covenants or other restrictions contained in debt instruments.
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Further, we may not be able
to realize the anticipated benefits of completed acquisitions. Some acquisition targets may not have a developed business or are experiencing
inefficiencies and incur losses. Additionally, small defense contractors which we consider suitable acquisition targets may be uniquely
dependent on their prior owners and the loss of such owners services following the completion of acquisitions may adversely affect
their business. Therefore, we may lose our investment in the event that the acquired businesses do not develop as planned, we cannot retain
key employees or that we are unable to achieve the anticipated cost efficiencies or reduction of losses.
Additionally, our acquisitions
have previously required, and any similar future transactions may also require, significant management efforts and expenditures. Regardless
of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, divert the attention of our
management and key employees and increase our expenses.
**Because we face significant competition for
acquisition and business opportunities, including from numerous companies with a business plan similar to ours, it may be difficult for
us to fully execute our business strategy. Additionally, our subsidiaries also operate in highly competitive industries, limiting their
ability to gain or maintain their positions in their respective industries.**
We expect to encounter intense
competition for acquisition and business opportunities from both strategic investors and other entities having a business objective similar
to ours, such as private investors (which may be individuals or investment partnerships), blank check companies including special purpose
acquisition companies, and other entities, domestic and international, competing for the type of businesses that we may acquire. Many
of these competitors possess greater technical, human and other resources, or more local industry knowledge, or greater access to capital,
than we do, and our financial resources may be relatively limited when contrasted with those of many of these competitors. These factors
may place us at a competitive disadvantage in successfully completing future acquisitions and investments.
In addition, while we believe
that there are numerous target businesses that we could potentially acquire or invest in, our ability to compete with respect to the acquisition
of certain target businesses that are sizable will be limited by our available financial resources. We may need to obtain additional financing
in order to consummate future acquisitions and investment opportunities and cannot assure you that any additional financing will be available
to us on acceptable terms, or at all, or that the terms of our existing financing arrangements will not limit our ability to do so. This
inherent competitive limitation gives others an advantage in pursuing acquisition and investment opportunities.
Furthermore, our subsidiaries
also face competition from both traditional and new market entrants that may adversely affect them as well, as discussed elsewhere in
these risk factors.
**Future acquisitions or business opportunities
could involve unknown risks that could harm our business and adversely affect our financial condition and results of operations**.
We are a diversified holding
company that owns interests in a number of different businesses across several industries. We have in the past, and intend in the future,
to acquire businesses or make investments, directly or indirectly through our subsidiaries, that involve unknown risks, some of which
will be particular to the industry in which the investment or acquisition targets operate, including risks in industries with which we
are not familiar or experienced. There can be no assurance our due diligence investigations will identify every matter that could have
a material adverse effect on us or the entities that we may acquire. We may be unable to adequately address the financial, legal and operational
risks raised by such investments or acquisitions, especially if we are unfamiliar with the relevant industry, which can lead to significant
losses on material investments. The realization of any unknown risks could expose us to unanticipated costs and liabilities and prevent
or limit us from realizing the projected benefits of the investments or acquisitions, which could adversely affect our financial condition
and liquidity. In addition, our financial condition, results of operations and the ability to service our debt may be adversely impacted
depending on the specific risks applicable to any business we invest in or acquire and our ability to address those risks.
**We face certain risks associated with the acquisition
or disposition of businesses and lack of control over certain of our investments.**
In pursuing our corporate
strategy, we may acquire, dispose of or exit businesses or reorganize existing investments. The success of this strategy is dependent
upon our ability to identify appropriate opportunities, negotiate transactions on favorable terms and ultimately complete such transactions.
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In the course of our acquisitions,
we may not acquire 100% ownership of certain of our operating subsidiaries or we may face delays in completing certain acquisitions, including
in acquiring full ownership of certain of our operating companies. Once we complete acquisitions or reorganizations there can be no assurance
that we will realize the anticipated benefits of any transaction, including revenue growth, operational efficiencies or expected synergies.
If we fail to recognize some or all of the strategic benefits and synergies expected from a transaction, goodwill and intangible assets
may be impaired in future periods. The negotiations associated with the acquisition and disposition of businesses could also disrupt our
ongoing business, distract management and employees or increase our expenses.
In addition, we may not be
able to integrate acquisitions successfully and we could incur or assume unknown or unanticipated liabilities or contingencies, which
may impact our results of operations. If we dispose of or otherwise exit certain businesses, there can be no assurance that we will not
incur certain disposition related charges, or that we will be able to reduce overhead related to the divested assets.
In the ordinary course of
our business, we evaluate the potential disposition of assets and businesses that may no longer help us meet our objectives or that no
longer fit with our broader strategy. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative
exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of our strategic objectives, or we may dispose
of a business at a price or on terms which are less than we had anticipated. In addition, there is a risk that we sell a business whose
subsequent performance exceeds our expectations, in which case our decision would have potentially sacrificed enterprise value.
**Our development stage companies may never produce
revenues or income.**
We have made investments in
and own stakes, either majority or minority, in a certain development stage companies. Each of these companies is at an early stage of
development and is subject to all business risks associated with a new enterprise, including constraints on their financial and personnel
resources, lack of established credit, the need to establish meaningful and beneficial vendor and customer relationships and uncertainties
regarding product development and future revenues. We anticipate that many of these companies will continue to incur substantial additional
operating losses for at least the next several years and expect their losses to increase as research and development efforts expand. There
can be no assurance as to when or whether any of these companies will be able to develop significant sources of revenue or that any of
their respective operations will become profitable, even if any of them is able to commercialize any products. As a result, we may not
realize any returns on our investments in these companies for a significant period of time, if at all, which could adversely affect our
business, results of operations, financial condition or liquidity.
**Divestitures and contingent liabilities from
divested businesses could adversely affect our business and financial results**.
We continually evaluate the
performance and strategic fit of all of our businesses and may sell businesses or product lines. Divestitures involve risks, including
difficulties in the separation of operations, services, products and personnel, the diversion of managements attention from other
business concerns, the disruption of our business, the potential loss of key employees and the retention of uncertain contingent liabilities,
including environmental liabilities, related to the divested business. When we decide to sell assets or a business, we may encounter difficulty
in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the achievement of our strategic
objectives. We may also dispose of a business at a price or on terms that are less desirable than we had anticipated, which could result
in significant asset impairment charges, including those related to goodwill and other intangible assets, that could have a material adverse
effect on our financial condition and results of operations. In addition, we may experience greater dis-synergies than expected, the impact
of the divestiture on our revenue growth may be larger than projected, and some divestitures may be dilutive to earnings. There can be
no assurance whether the strategic benefits and expected financial impact of the divestiture will be achieved. We cannot assure you that
we will be successful in managing these or any other significant risks that we encounter in divesting a business or product line, and
any divestiture we undertake could materially and adversely affect our business, financial condition, results of operations and cash flows.
**Risks Related to Related Party Transactions**
There may be conflicts of
interest between our company and certain of our related parties and their respective directors and officers which might not be resolved
in our favor. More importantly, there may be conflicts between certain of our related parties and their respective directors and officers
which might not be resolved in our favor. These risks are set forth below appurtenant to the relevant related party.
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Ault & Company
**Our relationship with Ault & Company may
enhance the difficulty inherent in obtaining financing for us as well as expose us to certain conflicts of interest.**
As of April 14, 2025, Ault & Company, of which Milton C. (Todd)
Ault, III is the chief executive officer, beneficially owned 34,832,482 shares of our common stock, consisting of (i) 8,249 shares of
Class A Common Stock owned, (ii) 4,234,561 shares of Class B Common Stock that are convertible into 4,234,561 shares of Class A Common
Stock and carries the voting power of 42,345,610 shares of Class A Common Stock, (iii) 29,561,308 shares of Class A Common Stock issuable
upon conversion of Series C Convertible Preferred Stock that carry the voting power of 464,576 shares of Class A Common Stock, (iv) 567,578
shares of Class A Common Stock issuable upon conversion of Series G Convertible Preferred Stock that carry the voting power of 153,748
shares of Class A Common Stock and (v) 460,786 shares of Class A Common Stock underlying warrants that are either presently exercisable
or exercisable within 60 days. As of April 14, 2025, Ault & Company beneficially owns approximately 95.8% of our common stock and
had the right to cast total votes of approximately 82.5% of all votes entitled to be cast at a stockholder meeting.
In addition, pursuant to the (i) November 2023 SPA, as amended, Ault
& Company has the right to purchase up to an additional $25 million of Series C Convertible Preferred Stock and Series C Warrants
and (ii) December 2024 SPA, Ault & Company has the right to purchase up to an additional $49.0 million of Series G Convertible Preferred
Stock and Series G Warrants, which would further increase their beneficial ownership. Given the close relationship between Ault &
Company, on the one hand, and our company, on the other, it is not inconceivable that we could further amend the November 2023 SPA or
December 2024 SPA or enter into additional securities purchase agreements with Ault & Company.
Although we have relied on
Ault & Company to finance us in the past, we cannot assure you that Ault & Company will assist us in the future. We would far
prefer to rely on Ault & Companys assistance compared to other sources of financing as the terms they provide us are in general
more favorable to us than we could obtain elsewhere. However, Messrs. Ault, Horne and Nisser could face a conflict of interest in that
they serve on the board of directors of each of Ault & Company and our company. If they determine that an investment in our company
is not in Ault & Companys best interest, we could be forced to seek financing from other sources that would not necessarily
be likely to provide us with equally favorable terms.
Other conflicts of interest
between us, on the one hand, and Ault & Company, on the other hand, may arise relating to commercial or strategic opportunities or
initiatives. Mr. Ault, as the controlling stockholder of Ault & Company, may not resolve such conflicts in our favor. For example,
we cannot assure you that Ault & Company would not pursue opportunities to provide financing to other entities whether or not it currently
has a relationship with such other entities. Furthermore, our ability to explore alternative sources of financing other than Ault &
Company may be constrained due to Mr. Aults vision for us and he may not wish for us to receive any financing at all other than
from entities that he controls.
Alzamend
**Our relationship with Alzamend may expose us
to certain conflicts of interest.**
As of April 14, 2025, we beneficially own 3,386,340 shares of Alzamends
common stock, representing approximately 34.2%, consisting of (i) 111 shares of common stock underlying currently exercisable warrants
we own, (ii) 77,268 shares of common stock held by Ault Lending, (iii) 2,982,107 shares of common stock issuable upon conversion of series
B convertible preferred stock of Alzamend (the ALZN Series B Preferred) held by Ault Lending and (iv) 210,000 shares
of common stock issuable upon exercise of currently exercisable warrants held by Ault Lending.In
addition, Ault Lending owns additional warrants to purchase shares of common stock that cannot be exercised due to beneficial ownership
blockers. Beyond the securities we beneficially own, Mr. Ault, our Chief Executive Officer, beneficially owns an additional 177,436 shares
of common stock, consisting of (i) 77,268 shares held by Mr. Ault, (ii) 99,619 shares held by Ault
Life Sciences, Inc. (ALSI) and (iii) 549 shares held by Ault Life Sciences Fund, LLC (ALSF). Mr. Ault has
sole voting and investment power with respect to the securities held of record by ALSI and ALSF.
Messrs. Ault, Horne and Nisser
could face a conflict of interest in that they serve on the board of directors of each of Alzamend and our company.
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ROI
**Our relationship with ROI may expose us to certain conflicts of
interest.**
As of April 14, 2025, we beneficially
own 1,829,901 shares of ROIs common stock, consisting of (i) 873,176 shares held by
Ault Lending, (ii) 293,358 shares issuable upon the conversion of outstanding shares of Series A Convertible Redeemable Preferred Stock
(ROI Series A Preferred) we own, and (iii) 663,367 shares issuable upon the conversion of outstanding shares of ROI Series
D Preferred we own. While as of April 14, 2025, we beneficially owned approximately 5.6% of ROIs common stock, we own shares of
Series B Convertible Preferred Stock (ROI Series B Preferred) and additional shares of ROI Series D Preferred that cannot
be converted unless we first obtain shareholder approval, in addition to beneficial ownership blockers and other restrictions. If shareholder
approval was obtained and there were no restrictions on the conversion of the securities we own, as of April 14, 2025, then we would beneficially
own 58.2% of ROIs common stock.
Messrs. Ault and Nisser could
face a conflict of interest in that they serve on the board of directors of each of ROI and our company.
**Risks Related to RiskOn**
**Our growth and profitability depend on continued
interest in social gaming and sweepstakes within the U.S., and shifts in consumer preferences could harm our business**
The acceptance of our Platform
hinges on sustained enthusiasm for sweepstakes-based social gaming and free-to-play models among U.S. consumers. If players begin favoring
alternative forms of entertainment, such as skill-based gaming, peer-to-peer betting, traditional online casino gambling (where legal),
or other digital experiences, then we may see a decline in user engagement. Rapid shifts in consumer taste, technological advancements
in gaming, or the emergence of more immersive entertainment platforms could all undermine the appeal of our Platform.
Maintaining user engagement
also requires us to stay current with ongoing trends, user preferences, and competing product offerings. If our platform does not frequently
update its game portfolio, introduce new sweepstakes concepts, or provide attractive incentives, users might lose interest and switch
to platforms perceived as more innovative. Additionally, negative publicity, whether founded or unfounded, about the integrity of our
sweepstakes, fairness of gameplay, or general user experience can substantially reduce engagement and erode trust, thus impacting our
revenue streams and brand reputation.
**BNCs products and changes to such products
could fail to attract or retain users or generate revenue and profits, or otherwise adversely affect BNCs business.**
BNCs ability to sustain
and grow its user base, and thereby increase revenue, relies substantially on introducing new sweepstakes offerings, social gaming experiences,
and platform features that remain engaging to existing players while attracting new ones. For example, rolling out a fresh sweepstakes
model, collaborating with third-party developers on innovative mini-games, or upgrading interactive social elements can entail substantial
costs. These initiatives also carry significant risk: if the new content fails to resonate with users or presents unanticipated technical
issues, BNC may struggle to see a return on its investments. Additionally, changes to the product line such as altering the way players
earn in-game currency or modifying prize structurescould prompt user dissatisfaction or confusion, leading to attrition.
Adapting the Platform to different
regulatory interpretations or market shifts may further complicate these efforts. While BNC concentrates on free-to-play sweepstakes that
are legally distinct from gambling, any adjustments to product features might draw heightened scrutiny from federal or state authorities
responsible for consumer protection or gaming laws. This scrutiny could increase the Companys compliance burden, potentially delay
product rollouts, or even lead to direct legal challenges. If BNCs new offerings or updates fail to meet users expectations
or do not comply with regulatory requirements, the Companys ability to generate revenue, maintain user engagement, or grow its
market share may be significantly compromised, ultimately harming its business and reputation.
**Our reliance on third-party certified game
providers creates operational, compliance, and reputational vulnerabilities that could adversely impact our business.**
BNC depends significantly
on third-party game providers to supply certified, compliance-tested games and core technological featuressuch as random number
generation modules, sweepstakes mechanics, and other elements that users rely on for fairness and transparency. If any provider fails
to maintain its certification, lapses in meeting regulatory standards, or experiences quality-control issues, we may have to remove or
suspend those games until the issues are resolved. This can lead to service gaps, user dissatisfaction, and potential regulatory scrutiny.
Moreover, we have limited oversight of our providers security protocols, development practices, and ongoing maintenance, which
means vulnerabilities or exploits in their systems could expose BNC to data breaches, game manipulation, or other cyber threats. Even
well-vetted vendors can face resource limitations, operational disruptions, or legal challenges that could prevent them from delivering
timely updates or patches.
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In addition, switching providers
or bringing certain gaming functions in-house on short notice can be time-consuming, technically complex and costly. We may need to develop
new applications that integrate into our Platform, which applications are currently provided by third party vendors, license alternative
software, or reconfigure our Platform infrastructure, each of which could interrupt users experience. Negotiating with new providers
may also require navigating different commercial and compliance frameworks, which can introduce delays and increase our administrative
burden. Furthermore, if a single major provider supplies several key games, that concentration of risk heightens our exposure should that
partner encounter financial difficulties or cease offering its products to us. Ultimately, any disruptions or degradations in third-party
game performance, or in the relationships themselves, may harm our users satisfaction as well as our revenue streams, and overall
ability to compete in the sweepstakes gaming area.
**The lack of comprehensive encryption for communications
on the Platform may increase the impact of a data security incident.**
Communications on the Platform
are not comprehensively encrypted at this time. As such, any data security incident that involves unauthorized access, acquisition, disclosure,
or use may be highly impactful to BNCs business. BNC may experience considerable incident response forensics, data recovery, legal
fees, and costs of notification related to any such potential incident, and BNC may face an increased risk of reputational harm, regulatory
enforcement, and consumer litigation, which could further harm BNCs business, financial condition, results of operations, and future
business opportunities.
**Challenges in advertising and promoting our
sweepstakes could hinder our user acquisition and revenue growth.**
Advertising our sweepstakes-based
social gaming platform presents unique legal and operational complexities. Federal and state regulations often place restrictions on how
promotional materials may be worded to avoid the appearance of gambling or any implication that a purchase is necessary to enter. These
rules can mandate specific disclosures, such as No Purchase Necessary or detailed eligibility requirements, and impose substantial
penalties for noncompliance, including fines or injunctions. The heightened scrutiny around promotional statements also means we must
carefully vet all advertising, whether digital, print or social media, to ensure we do not inadvertently violate regulations in any state
where our users reside.
Moreover, major online advertising
channels such as Google Ads, Facebook, and mobile app networks frequently maintain strict policies against content perceived as gambling
or misleading pay-to-play promotions. Our ads may be subject to frequent reviews, suspensions, or outright bans if deemed
non-compliant with these platforms terms. Even when ads are allowed, we may need to invest heavily in specialized compliance expertise
or premium ad placements to achieve visibility, pushing user-acquisition costs higher than in other online gaming segments. Additionally,
because our revenue hinges on attracting engaged users who understand the sweepstakes model, any misperception in advertising, such as
implying guaranteed payouts or pay-only entries, could invite reputational damage, user dissatisfaction, or regulatory scrutiny. These
challenges can collectively reduce our ability to scale efficiently, constrain our marketing strategies, and, ultimately, affect our ability
to generate revenue from new or existing users.
**A perceived lack of fairness in outcomes or
prize distribution could severely damage brand trust.**
Transparency around how winners
are chosen, and assurances that virtual coin purchases do not guarantee victory, form the bedrock of our Platforms integrity. Any
misperception that sweepstakes are rigged, or that some participants have insider advantages, can spread virally. Users might abandon
the platform in droves, while regulators could initiate investigations into alleged unfair practices. Even if claims prove baseless, the
time and resources spent defending our practices could distract management and strain finances.
Risks Related to Government Regulation and
Enforcement Regarding BNC
**Our sweepstakes model could be reclassified
as gambling or otherwise face tighter restrictions in certain U.S. states, which would materially affect our operations.**
We carefully structure our
Platform to comply with sweepstakes rules and avoid classification as gambling, yet the line between promotional sweepstakes
and illegal gambling can sometimes be blurry. Individual states have differing definitions of what constitutes consideration,
chance, and prize, which constitute the three criteria generally used to determine legality. Should one or more states enact new legislation
or reinterpret existing laws to classify our sweepstakes model as gambling, our ability to operate in those states could be significantly
curtailed.
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Such a determination could
subject us to new licensing requirements, higher taxes, or additional consumer protection measures. In extreme circumstances, states could
ban our activities entirely. The financial and operational costs of complying with gambling regulations, obtaining licenses, or redesigning
our platform to exclude users from certain states would be substantial. Any actual or perceived classification as gambling might also
deter users who are uncomfortable with real or perceived gambling-related activities, reducing participation and revenue.
**We are subject to complex and evolving U.S.
federal and state sweepstakes and consumer protection laws, which may impose substantial compliance burdens and operational constraints.**
Operating as a sweepstakes
social gaming platform in the United States requires adherence to a tangle of rules and regulations, including federal guidelines on sweepstakes
and promotions, as well as a variety of state-specific laws. Many of these laws mandate alternative methods of entry, specific disclosures,
detailed recordkeeping, and in certain cases, bonding or registration. The costs and administrative burdens of fulfilling these requirements
can be significant, especially as we expand to new states or introduce new sweepstakes features.
Furthermore, any misstep,
even if inadvertent, in the design or execution of a sweepstakes could lead to allegations of illegal gambling, unfair trade practices,
or other regulatory violations. Certain states are particularly vigilant in policing sweepstakes models to ensure they do not equate to
games of chance that require a license or explicit regulatory oversight. If a regulator determines that some aspect of our Platform falls
outside permissible sweepstakes parameters, we could face fines, injunctions, forced modifications, or even closure of operations in that
jurisdiction. These regulatory uncertainties necessitate ongoing legal review and a level of caution that can delay or complicate product
innovations.
As its business develops,
BNC expects to become subject to significant legislative and regulatory developments; further, new legislation and regulations could significantly
affect BNCs business in the future. These laws and regulations, as well as any associated claims, inquiries, or investigations
or any other government actions, have in the past led to, and may in the future lead to, unfavorable outcomes including increased compliance
costs, loss of revenue, delays or impediments in the development of new products, negative publicity and reputational harm, increased
operating costs, diversion of management time and attention, and remedies that harm BNCs business, including fines or demands or
orders that BNC modify or cease existing business practices.
**Regulatory inquiries or legal proceedings related
to AML, consumer fraud, or other compliance areas could disrupt our business and harm our reputation.**
While our U.S. sweepstakes
platform is not intended to handle large financial transactions typically associated with online casinos, we do permit the purchase of
virtual coins and awards of monetary or tangible prizes. Even these more modest transactions can draw scrutiny from authorities concerned
about AML or potential consumer fraud. If regulators believe our Platform is used, knowingly or otherwise, to facilitate unlawful financial
activities, we could be required to invest in more comprehensive monitoring systems, implement additional customer due diligence, or face
enforcement actions and penalties.
Any high-profile investigation
or lawsuit ,whether or not it leads to a formal penalty, may also attract unwanted media attention, casting doubt on our security measures
and the integrity of our games. Damage to our brands reputation could undermine user confidence, leading to reduced engagement,
fewer new sign-ups, and diminished revenue streams. We might also face lawsuits from users or other parties alleging deceptive practices,
demanding refunds, or claiming injuries from fraudulent or unauthorized activities. Even if these claims lack merit, the cost of litigation,
along with the potential impact on our Platforms public perception, can be considerable.
Risks Related to Data, Security, and Intellectual
Property
**Security breaches, unauthorized attempts to
manipulate or cheat sweepstakes outcomes, and other cyber incidents could undermine trust in the Platform and adversely
affect BNCs business.**
BNCs sweepstakes-based
social gaming environment involves the collection, storage, and transmission of substantial amounts of user data, including personal information,
payment details for virtual coin purchases, and records of sweepstakes entries or prize awards. Bad actors who gain access to this dataor
to the underlying mechanics that determine sweepstakes winnerscan distort the Platforms fairness, thereby undermining user
confidence in BNCs legitimacy. Cheating attempts may include automated scripts or bots designed to submit multiple entries, exploit
software vulnerabilities, or manipulate game outcomes. Similarly, broader cyber threats such as hacking, malware, phishing, and social
engineering attacks can compromise user accounts, disrupt platform availability, and lead to the theft or misuse of sensitive information.
These incidents, in turn, could trigger regulatory investigations, private legal actions, and widespread reputational harm if users believe
that BNC cannot safeguard their data or ensure the integrity of its sweepstakes.
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BNC takes measures intended
to prevent, detect, and respond to these threats, including firewalls, encryption, account verification protocols, and ongoing security
monitoring. However, software bugs, configuration errors, or newly emerging hacking techniques can frustrate even the best efforts, especially
as criminals become more sophisticated. Additionally, employee or contractor malfeasance, physical security breaches at data centers,
or oversights by third-party vendors that store or process user information for BNC may expose the Company to further vulnerability. Remote
work arrangements can compound these risks by creating new attack surfaces, such as unsecured home networks or personal devices. Any successful
cyber-attack, or even a serious attempt at one, may require BNC to invest considerable resources in forensics, remediation, user notification,
and litigation defense. This would not only divert managements attention but could also erode BNCs active user base and
competitiveness if players perceive the Platform to be unsafe or prone to cheating. Furthermore, compliance with U.S. cybersecurity and
data protection laws could lead to additional costs and operational changes in the wake of a breach. Failure to address these risks promptly
and effectively could have a material adverse effect on BNCs business, financial results, and reputation among regulators and users
alike.
**We anticipate that BNCs efforts related
to privacy, safety, security, and content review will identify additional instances of misuse of user data or other undesirable activity
by third parties on the Platform.**
In addition to BNCs
efforts to mitigate cybersecurity risks, BNC intends to make investments in privacy, safety, security, and content review efforts to combat
misuse of BNCs services and user data by third parties, including investigations and audits of platform applications, as well as
other enforcement efforts. As a result of these efforts BNC anticipates that BNC will discover and announce additional incidents of misuse
of user data or other undesirable activity by third parties. BNC may not discover all such incidents or activity, whether as a result
of BNCs data or technical limitations, including BNCs lack of visibility over BNCs encrypted services, the allocation
of resources to other projects, or other factors, and BNC may be notified of such incidents or activity by the FTC, the media or other
third parties. Such incidents and activities may in the future include the use of user data or BNCs systems in a manner inconsistent
with BNCs terms, contracts or policies, the existence of false or undesirable user accounts, improper advertising practices, activities
that threaten peoples safety on or offline, or instances of spamming, scraping, data harvesting, unsecured datasets, or spreading
misinformation. BNC may also be unsuccessful in its efforts to enforce BNCs policies or otherwise remediate any such incidents.
Consequences of any of the foregoing developments include negative effects on user trust and engagement, harm to BNCs reputation,
changes to BNCs business practices in a manner adverse to BNCs business, and adverse effects on BNCs business and
financial results. Any such developments may also subject BNC to additional litigation and regulatory inquiries, which could subject BNC
to monetary penalties and damages, divert managements time and attention, and lead to enhanced regulatory oversight.
**BNCs products and internal systems rely
on software and hardware that is highly technical, and any errors, bugs, or vulnerabilities in these systems, or failures to address or
mitigate technical limitations in BNCs systems, could adversely affect BNCs business.**
BNCs products and internal
systems rely on software and hardware, including software and hardware developed or maintained internally and/or by third parties, that
is highly technical and complex. In addition, BNCs products and internal systems depend on the ability of such software and hardware
to store, retrieve, process, and manage considerable amounts of data. The software and hardware on which BNC relies is expected to contain
errors, bugs, or vulnerabilities, and BNCs systems are subject to certain technical limitations that may compromise BNCs
ability to meet BNCs objectives. Some errors, bugs, or vulnerabilities inherently may be difficult to detect and may only be discovered
after the code has been released for external or internal use. Errors, bugs, vulnerabilities, design defects, or technical limitations
within the software and hardware on which BNC relies, or human error in using such systems, may in the future lead to outcomes including
a negative experience for users and marketers who use BNCs products, compromised ability of BNCs products to perform in
a manner consistent with BNCs terms, contracts, or policies, delayed product introductions or enhancements, targeting, measurement,
or billing errors, compromised ability to protect the data of BNCs users and/or BNCs intellectual property or other data,
or reductions in BNCs ability to provide some or all of BNCs services. In addition, any errors, bugs, vulnerabilities, or
defects in BNCs systems or the software and hardware on which BNC relies, failures to properly address or mitigate the technical
limitations in BNCs systems, or associated degradations or interruptions of service or failures to fulfill BNCs commitments
to BNCs users, are expected to lead to outcomes including damage to BNCs reputation, loss of users, loss of marketers, prevention
of its ability to generate revenue, regulatory inquiries, litigation, or liability for fines, damages, or other remedies, any of which
could adversely affect BNCs business and financial results.
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**Risks Related to askROI**
**We rely on an exclusive LLM licensing arrangement
and a platform development agreement with the same primary developer, even though we maintain ownership of the askROI platforms
IP.**
askROIs AI-driven offerings
depend on a proprietary LLM licensed under an exclusive agreement (the License Agreement) with a third-party provider (the
Licensor), which also serves as the primary developer of our platform under a separate development agreement. Although we
retain ownership of the askROI Platforms intellectual property, our day-to-day innovation and updates rely heavily on the Licensors
technical expertise, resources and timely performance.
If the License Agreement is
terminated, expires, or becomes subject to unfavorable terms, we could lose or face restrictions on the proprietary LLM functionality
integral to our products performance. Similarly, if disputes arise or the development agreement is breached, whether due to missed
milestones, shifting priorities, or misaligned strategic objectives, our ability to maintain, enhance, and scale the platform could be
severely compromised. Even though we technically own the underlying software, replacing a primary developer or transitioning to an alternative
solution could be time-consuming, costly and risky, potentially delaying product rollouts and damaging customer relationships.
Because both the License Agreement
and the platform development hinge on a single partner, a deterioration in our relationship with the Licensor could simultaneously threaten
our AI functionality and our capacity to enhance the capability of the askROI Platform. Such a scenario would materially and adversely
affect our competitiveness, financial condition, and prospects for growth.
**Despite our multi-LLM routing model, performance
or reliability issues with our primary development partners LLM could still harm our product quality and reputation.**
Our new routing model
allows us to tap into multiple LLMs, theoretically reducing reliance on one provider. However, our primary developer and Licensor remains
the key source of certain proprietary AI functionalities and platform support, meaning that ongoing performance or reliability problems
with its LLM technology could still cause significant product disruptions. Security breaches, downtime, or limited adaptability in the
Licensors services may reduce customer satisfaction, delay important product updates or damage our brand. Since we do not control
the Licensors internal operations, we are vulnerable to technical or strategic changes that could negatively impact our services.
**askROI faces risks commonly associated with
start-up companies.**
askROI faces risks commonly
associated with start-up companies. As a start-up company, askROI may face difficulties in validating market demand for its AI-powered
insights platform, which could adversely impact its ability to attract and acquire customers. Further, enterprise sales cycles can be
lengthy, particularly for a start-up company without an established track record. Prolonged sales cycles could strain askROIs cash
flow and hinder growth, and (iii) reliance on a few large customers could make askROI vulnerable to revenue volatility and adversely impact
its bargaining power. If any of the foregoing risks were to materialize, askROIs business and future prospects could be materially
and adversely affected.
**askROI faces adoption and integration and other
challenges.**
askROI faces adoption and
integration challenges. Complex onboarding processes or steep learning curves could slow customer adoption and time-to-value realization.
Further, its software could be difficult to integrate with a customers legacy systems, leading to challenges with customers
legacy systems and tools. Any difficulties associated with the integration of different systems could limit askROIs market penetration
and customer satisfaction. In addition, the Licensors development team may have limited capacity to support askROIs platform
development needs, particularly if askROI were to begin seeing significant growth and require more rapid iterations and customizations.
Also, the LLM technology may not be optimized for the scale and performance requirements of askROIs growing user base, leading
to performance bottlenecks and customer dissatisfaction. Additionally, as a new entrant in the market, askROI may struggle to establish
brand awareness and credibility, making it harder to attract customers and partners. Similarly, any negative publicity or customer complaints
could disproportionately impact askROIs reputation as a startup, hindering its growth and ability to compete against established
players. If any of the foregoing risks were to materialize, askROIs business and future prospects could be materially and adversely
affected.
**Rapidly changing AI regulation may require
significant adjustments and investments.**
Governments and regulatory
bodies worldwide are introducing new laws and guidelines for AI, data privacy, and automated decision-making. These regulations may force
us to modify certain features, require additional transparency or auditing tools, or limit our platforms functionality. Complying
with emerging or conflicting rules across jurisdictions could raise operating costs or delay product rollouts. Failure to meet these requirements
could result in fines, legal action, or reputational harm.
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**Data privacy and security laws could increase
compliance costs and limit our flexibility.**
Various jurisdictions are
adopting stricter data privacy and security regulations, such as the GDPR in the EU and certain U.S. state privacy laws. We must continually
enhance our security measures, encryption protocols, and data handling procedures to remain compliant. These changes could increase our
operational expenses. Any failure to comply with evolving data protection requirements may lead to enforcement actions, penalties, or
erosion of customer trust.
**Established technology companies with greater
resources may outcompete us.**
Larger technology firms with
substantial financial and technical resources continue to expand their AI-driven offerings, sometimes bundling analytics solutions into
broader enterprise software suites. These competitors may benefit from existing customer relationships, extensive R&D budgets, and
powerful marketing capabilities. If they introduce more advanced or cost-effective solutions, we may find it difficult to retain or attract
customers, thereby adversely impacting our revenue and market share.
**Our future success depends on ongoing innovation
and technological advancements.**
The market for AI-driven analytics
is evolving rapidly. We must invest in research and development to remain competitive in natural language processing, data visualization,
and user experience. If we fail to keep pace with or anticipate market trends, or if the capabilities of our platform lag behind those
of our competitors, our solutions may become less attractive, resulting in lost revenue and diminished market position.
**Our platforms integration with third-party
tools and systems may present technical and operational risks.**
askROI relies on seamless
integration with a wide range of external applications, including customer relations management platforms, file storage providers, and
communication tools. If these third parties modify their application programming interfaces, introduce incompatibilities, or discontinue
services, we may need to invest significant resources to maintain compatibility. Difficulties integrating with common enterprise systems
could hamper our ability to onboard new customers efficiently.
**We rely on secure workspaces and knowledge
bases that may still pose data exposure risks.**
Even though we do not train
the underlying LLM on customers proprietary information, we host and index their data within dedicated workspaces. Any unauthorized
access, security breach, or deficiency in our data-protection measures could expose confidential information, leading to legal liability,
regulatory scrutiny and reputational damage.
**Inaccurate or biased AI outputs could expose
us to reputational and legal risks.**
Our AI-driven insights may
occasionally generate incorrect or biased results. Such outcomes could lead customers to make flawed business decisions, undermine confidence
in our platform, or result in litigation. Ongoing model validation and prompt issue resolution are crucial to mitigating these risks.
**Our proprietary rights could be inadequately
protected, leading to IP disputes.**
The unique components of our
platform and certain enhancements we develop may be subject to intellectual property protection. If we fail to enforce or defend our rights,
or if third parties allege that our technology infringes on their IP, we could face costly litigation and be required to alter or cease
certain offerings. Such disputes can disrupt operations and harm our reputation.
**Customer retention risks could pose a challenge
for askROI.**
askROI may experience difficulties
in retaining customers. Any failure on its part to achieve strong product-market fit could lead to high customer churn rates, as businesses
may not perceive sufficient value in askROIs offerings. Further, as a newly formed entity, askROI may struggle to provide the level
of customer support expected by enterprise clients, which could have a materially adverse impact on customer satisfaction and retention.
Finally, low barriers to entry and minimal switching costs in the AI and analytics market could make it easier for customers to move to
competitors, thereby increasing askROIs customer retention risks. If any of these developments were to occur, askROIs business
and future prospects could be materially and adversely affected.
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**Ethical AI concerns.**
The AI industry is commonly
associated with ethical concerns, whether real or perceived, which askROI must overcome in order to successfully develop its business.
Such concerns include the risk that unintended biases in askROIs AI models could lead to discriminatory or unfair outcomes, damage
the entitys reputation and expose it to legal risks, and that difficulty in providing clear explanations for AI-generated insights
could erode customer trust and hinder adoption of askROIs product offerings. If askROI cannot substantially mitigate or prevent
such concerns from arising, its business and future prospects could be materially and adversely affected.
**Uncertain legal interpretations of emerging
AI regulations could lead to operational constraints.**
Because AI-related laws and
guidelines are still developing, legal interpretations can vary widely across different regulators and courts. We may need to adjust our
platform functionality or compliance processes in response to evolving interpretations, which could divert resources from other initiatives
and slow innovation.
**If we fail to effectively manage our growth,
our business could suffer.**
Rapid or poorly managed growth
could lead to operational inefficiencies, resource strains, and quality control issues. We may also face challenges in maintaining our
corporate culture or onboarding new staff quickly. If we cannot scale responsibly, product quality or customer satisfaction could decline,
harming our market reputation.
**Risks Related to TurnOnGreen**
**TurnOnGreen can provide no assurance of any
successful expansion of its operations.**
TurnOnGreens significant
increase in the scope and the scale of its operations, including the hiring of additional personnel, has resulted in significantly higher
operating expenses. TurnOnGreen anticipates that its operating expenses will continue to increase. Expansion of its operations may also
make significant demands on its management, finances and other resources. Its ability to manage the anticipated future growth, should
it occur, will depend upon a significant expansion of its accounting and other internal management systems and the implementation and
subsequent improvement of a variety of systems, procedures and controls. TurnOnGreen cannot assure that significant problems in these
areas will not occur. Failure to expand these areas and implement and improve such systems, procedures and controls in an efficient manner
at a pace consistent with its business could have a material adverse effect on its business, financial condition and results of operations.
TurnOnGreen cannot assure that attempts to expand its marketing, sales, manufacturing and customer support efforts will succeed or generate
additional sales or profits in any future period. As a result of the expansion of its operations and the anticipated increase in its operating
expenses, along with the difficulty in forecasting revenue levels, TurnOnGreen expects to continue to experience significant fluctuations
in its results of operations.
**Changes in U.S. and international trade policies,
particularly with respect to China, and key trading countries, may adversely impact TurnOnGreens business and operating results.**
TurnOnGreen currently relies on foreign
third-party manufacturers, and parts suppliers, including those in China, Taiwan, Israel, and other countries. The U.S. government and
persons involved in the Trump administration have made statements and taken certain actions that may lead to potential changes to U.S.
and international trade policies. In April 2025, the U.S. government announced a combined total
rate of at least 145%, which includes the 20% in place since February 2025 on imports from China. If maintained and if extended
to other countries, tariffs, and the potential escalation of trade disputes with China and other countries could pose a significant risk
to its business and could result in higher cost of revenues and operating expenses. The extent and duration of any tariffs and the resulting
impact on general economic conditions and on its business are uncertain and depend on various factors, such as negotiations between the
United States and China and/or other countries, the response of such countries, exemptions or exclusions that may be granted, availability.
**TurnOnGreen is in a highly competitive EV charging
services industry and there can be no assurance that TurnOnGreen will be able to compete with many of its competitors which are larger
and have greater financial resources.**
TurnOnGreen faces strong competition
from competitors in the EV charging services industry, including competitors who could duplicate its model. Many of these competitors
may have substantially greater financial, marketing and development resources and other capabilities than us. In addition, there are very
few barriers to entry into the market for its services. There can be no assurance, therefore, that any of its current and future competitors,
many of whom may have far greater resources, will not independently develop services that are substantially equivalent or superior to
its services. Therefore, an investment in its company is very risky and speculative due to the competitive environment in which TurnOnGreen
may operate.
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Its competitors may be able
to provide customers with different or greater capabilities or benefits than TurnOnGreen can provide in areas such as technical qualifications,
past contract performance, geographic presence and driver price. Further, many of its competitors may be able to utilize substantially
greater resources and economies of scale to develop competing products and technologies, divert sales away from us by winning broader
contracts or hire away its employees by offering more lucrative compensation packages.
**Risks Related to Ownership of Our Class
A Common Stock and Future Offerings**
**If we do not continue to satisfy the NYSE American
continued listing requirements, our Class A common stock could be delisted from NYSE American.**
The listing of our Class A
common stock on the NYSE American is contingent on our compliance with the NYSE Americans conditions for continued listing.
We were notified by the NYSE
American on December 18, 2024 that, due to our disclosure in our Form 10-Q filed for the fiscal period ended September 30, 2024, which
reported stockholders equity of approximately $2.2 million, we no longer met the requirement that we must have no less than $6
million or more in stockholders equity pursuant to the listing standard set forth under Section 1003(a)(ii) and (iii) of the NYSE
American Company Guide (the Listing Standards) because we have reported losses from continuing operations and/or net losses
in five of our most recent fiscal years ended December 31, 2023. Under the applicable NYSE American listing rules, we were required to,
no later than January 17, 2025, submit a compliance plan that demonstrates how we intend to regain compliance with the Listing Standards
within 18 months of the receipt of the notice, or June 18, 2026. The compliance plan was submitted to the NYSE American on January 17,
2025. We have, at the request of the NYSE American, provided supplements to the original compliance plan. On March 4, 2025, the NYSE American
notified us that we have been granted a listing extension until June 18, 2026 on the basis of the compliance plan we recently submitted
to regain compliance with the Listing Standards.
If
we do not make progress consistent with the plan during the plan period, the NYSE American will initiate delisting procedures. We will
be subject to periodic reviews including quarterly monitoring for compliance with the plan. Additionally, if we were to fail to meet any
other NYSE American listing requirement, we may be subject to delisting by the NYSE American. In the event our Class A common stock is
no longer listed for trading on the NYSE American, our trading volume and share price may decrease and we may experience further difficulties
in raising capital which could materially affect our operations and financial results. Further, delisting from the NYSE American could
also have other negative effects, including potential loss of confidence by partners, lenders, suppliers and employees and could also
trigger various defaults under our lending agreements and other outstanding agreements. Finally, delisting could make it harder for us
to raise capital and sell securities. You may experience future dilution as a result of future equity offerings. In order to raise additional
capital, we may in the future offer additional shares of our Class A common stock or other securities convertible into or exchangeable
for our Class A common stock at prices that may not be the same as the price per share in this offering. We may sell shares or other securities
in any other offering at a price per share that is less than the price per share paid by investors in this offering, and investors purchasing
shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional
shares of our Class A common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher
or lower than the price per share paid by existing investors.
**You may experience future dilution as a result of future equity
offerings.**
In order to raise additional
capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our
common stock at prices that may not be the same as the price per share in this offering. We may sell shares or other securities in any
other offering at a price per share that is less than the price per share paid by investors in this offering, and investors purchasing
shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional
shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower
than the price per share paid by investors.
**Our Class A common stock price is volatile.**
Our Class A common stock is listed on the
NYSE American. In the past, our trading price has fluctuated widely, depending on many factors that may have little to do with our operations
or business prospects. During the past 52-week period (through April 11, 2025), our stock closed at prices between $16.47 per share and
$2.18 per share, as reported on Nasdaq.com. On April 11, 2025, the price of our Class A common stock closed at $2.35 per share.
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Stock markets, in general,
have experienced, and continue to experience, significant price and volume volatility, and the market price of our Class A common stock
may continue to be subject to similar market fluctuations unrelated to our operating performance or prospects. This increased volatility,
coupled with depressed economic conditions, could continue to have a depressive effect on the market price of our Class A common stock.
The following factors, many of which are beyond our control, may influence our stock price:
|
| the status of our growth strategy including the
development of new products with any proceeds we may be able to raise in the future; | |
|
| announcements of technological or competitive
developments; | |
|
| announcements or expectations of additional financing
efforts; | |
|
| our ability to market new and enhanced products
on a timely basis; | |
|
| changes in laws and regulations affecting our
business; | |
|
| commencement of, or involvement in, litigation
involving us; | |
|
| regulatory developments affecting us, our customers
or our competitors; | |
|
| announcements regarding patent or other intellectual
property litigation or the issuance of patents to us or our competitors or updates with respect to the enforceability of patents or other
intellectual property rights generally in the US or internationally; | |
|
| actual or anticipated fluctuations in our quarterly
financial results or the quarterly financial results of companies perceived to be similar to us; | |
|
| changes in the markets expectations about
our operating results; | |
|
| our operating results failing to meet the expectations
of securities analysts or investors in a particular period; | |
|
| changes in the economic performance or market
valuations of our competitors; | |
|
| additions or departures of our executive officers; | |
|
| sales or perceived sales of our common stock
by us, our insiders or our other stockholders; | |
|
| share price and volume fluctuations attributable
to inconsistent trading volume levels of our shares; and | |
|
| general economic, industry, political and market
conditions andoverall fluctuations in the financial markets in the United States and abroad. | |
In addition, the securities
markets have, from time to time, experienced significant price and volume fluctuations that are not related to the operating performance
of particular companies. Any of these factors could result in large and sudden changes in the volume and trading price of our Class A
common stock and could cause our stockholders to incur substantial losses. In the past, following periods of volatility in the market
price of a companys securities, stockholders have often instituted securities class action litigation against that company. If
we were involved in a class action suit or other securities litigation, it would divert the attention of our senior management, require
us to incur significant expense and, whether or not adversely determined, have a material adverse effect on our business, financial condition,
results of operations and prospects.
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**Volatility in our Class A common stock price may subject us to securities
litigation.**
Stock markets, in general,
have experienced, and continue to experience, significant price and volume volatility, and the market price of our Class A common stock
may continue to be subject to similar market fluctuations unrelated to our operating performance or prospects. This increased volatility,
coupled with depressed economic conditions, could have a depressing effect on the market price of our Class A common stock.
In addition, the securities
markets have, from time to time, experienced significant price and volume fluctuations that are not related to the operating performance
of particular companies. Any of these factors could result in large and sudden changes in the volume and trading price of our Class A
common stock and could cause our stockholders to incur substantial losses. In the past, following periods of volatility in the market
price of a companys securities, stockholders have often instituted securities class action litigation against that company. If
we were involved in a class action suit or other securities litigation, it would divert the attention of our senior management, require
us to incur significant expense and, whether or not adversely determined, have a material adverse effect on our business, financial condition,
results of operations and prospects.
**We have a substantial
number of convertible notes, warrants and preferred stock outstanding that could affect our price.**
Due to a number of financings, we have a substantial number of shares
that are subject to issuance pursuant to outstanding convertible debt, warrants and options. As of April 14, 2025, the number of shares
of Class A common stock subject to convertible notes, warrants, class B common stock, Series C Convertible Preferred Stock and Series
G Preferred Stock were 8,248,865, 622,207, 4,995,724, 29,561,308 and 508,455, respectively. The issuance of Class A common stock pursuant
to convertible notes, warrants and preferred stock at conversion or exercise prices lower than market prices may have the effect of limiting
an increase in the market price of our Class A common stock.
**General Risk Factors**
**Our limited operating history makes it difficult
to evaluate our future business prospects and to make decisions based on our historical performance**.
Although our executive officers
have been engaged in the industries in which we operate for varying degrees of time, we did not begin operations of our current business
until recently. We have a very limited operating history in our current form, which makes it difficult to evaluate our business on the
basis of historical operations. As a consequence, it is difficult, if not impossible, to forecast our future results based upon our historical
data. Reliance on our historical results may not be representative of the results we will achieve, and for certain areas in which we operate,
principally those unrelated to defense contracting, will not be indicative at all. Because of the uncertainties related to our lack of
historical operations, we may be hindered in our ability to anticipate and timely adapt to increases or decreases in sales, product costs
or expenses. If we make poor budgetary decisions as a result of unreliable historical data, we could be less profitable or incur losses,
which may result in a decline in our stock price.
**Deterioration of global economic conditions
could adversely affect our business**.
The global economy and capital
and credit markets have experienced exceptional turmoil and upheaval over the past several years. Ongoing concerns about the systemic
impact of potential long-term and widespread recession and potentially prolonged economic recovery, volatile energy costs, fluctuating
commodity prices and interest rates, volatile exchange rates, geopolitical issues, including the conflicts between Russia and Ukraine
and between Israel and Hamas, natural disasters and pandemic illness, instability in credit markets, cost and terms of credit, consumer
and business confidence and demand, a changing financial, regulatory and political environment, and substantially increased unemployment
rates have all contributed to increased market volatility and diminished expectations for many established and emerging economies, including
those in which we operate. Furthermore, austerity measures that certain countries may agree to as part of any debt crisis or disruptions
to major financial trading markets may adversely affect world economic conditions and have an adverse impact on our business. These general
economic conditions could have a material adverse effect on our cash flow from operations, results of operations and overall financial
condition.
The availability, cost and
terms of credit also have been and may continue to be adversely affected by illiquid markets and wider credit spreads. Concern about the
stability of the markets generally, and the strength of counterparties specifically, has led many lenders and institutional investors
to reduce credit to businesses and consumers. These factors have led to a decrease in spending by businesses and consumers over the past
several years, and a corresponding slowdown in global infrastructure spending.
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Continued uncertainty in the
U.S. and international markets and economies and prolonged stagnation in business and consumer spending may adversely affect our liquidity
and financial condition, and the liquidity and financial condition of our customers, including our ability to access capital markets and
obtain capital lease financing to meet liquidity needs.
**If we fail to establish and maintain an effective
system of internal control over financial reporting, we may not be able to report our financial results accurately or prevent fraud. Any
inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price
of our Class A common stock.**
Effective internal control
over financial reporting is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed,
and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies
may adversely affect our financial condition, results of operations and access to capital. We have carried out an evaluation under the
supervision and with the participation of our management, including our principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the most recent period covered
by this report. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure
controls and procedures were not effective at the reasonable assurance level due to the material weakness described below.
A material weakness is a deficiency,
or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (PCAOB) Audit Standard
No. 5, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material
weakness which has caused management to conclude that as of December 31, 2024, our internal control over financial reporting (ICFR)
was not effective at the reasonable assurance level.
We do not have sufficient
resources in our accounting function, which restricts our ability to gather, analyze and properly review information related to financial
reporting, including fair value estimates, in a timely manner. In addition, due to our size and nature, segregation of all conflicting
duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions,
the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of
our failure to have segregation of duties during our assessment of our disclosure controls and procedures and concluded that the resulting
control deficiency represented a material weakness.
We are currently working to
improve and simplify our internal processes and implement enhanced controls to address the material weakness in our internal control over
financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures. This material weakness will not be considered
to be remediated until the applicable remediated controls are operating for a sufficient period of time and management has concluded,
through testing, that these controls are operating effectively.
**If our accounting
controls and procedures are circumvented or otherwise fail to achieve their intended purposes, our business could be seriously harmed.**
We
evaluate our disclosure controls and procedures as of the end of each fiscal quarter, and annually review and evaluate our internal control
over financial reporting in order to comply with the SECs rules relating to internal control over financial reporting adopted pursuant
to the Sarbanes-Oxley Act of 2002. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If we fail
to maintain effective internal control over financial reporting or our management does not timely assess the adequacy of such internal
control, we may be subject to regulatory sanctions, and our reputation may decline.
**Our internal computer
systems may fail or suffer security breaches, which could result in a material disruption of our operations**.
Like
any other business, we rely on e-mail and other digital communications methods as part of our normal operations. As such, our internal
computer systems and servers could fail or suffer security breaches, possibly resulting in a material disruption to our operations. The
secure operation of our IT networks and systems as well as the secure processing and maintenance of information is critical to our operations
and business strategy. Notwithstanding these priorities, we have experienced attempts at cybercrime such as phishing and other electronic
fraud, including efforts to misdirect payments to imposter vendors and service providers. After experiencing a financial loss due to e-mail
fraud in November 2021, we have instituted greater internal controls and procedures, both electronic and non-electronic, to combat such
fraudulent conduct. We also maintain an insurance policy to cover any losses or injuries suffered from cybercrime of this nature; however,
it may not be sufficient to cover all damages. Despite our efforts, attempts at fraud such as spoofed e-mails, requests for payment and
similar deceptions have become commonplace in the world of e-commerce and are expected to continue. If we are unable to prevent such security
breaches in the future, these events or circumstances could materially and adversely affect our operations, financial condition and operating
results and impair our ability to execute our business strategy.
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**We face significant competition, including changes in pricing.**
The markets for our products
and services are both competitive and price sensitive. Many competitors have significant financial, operations, sales and marketing resources,
plus experience in research and development, and compete with us by offering lower prices. Competitors could develop new technologies
that compete with our products to achieve a lower unit price. If a competitor develops lower cost and/or superior technology or cost-effective
alternatives to our products and services, our business could be seriously harmed.
The markets for some of our
products are also subject to specific competitive risks because these markets are highly price sensitive. Our competitors have competed
in the past by lowering prices on certain products. If they do so again, we may be forced to respond by lowering our prices. This would
reduce sales revenues and increase losses. Failure to anticipate and respond to price competition may also impact sales and aggravate
losses.
**Many of our competitors are larger and have
greater financial and other resources than we do.**
Our products compete and will
compete with similar if not identical products produced by our competitors. These competitive products could be marketed by well-established,
successful companies that possess greater financial, marketing, distribution personnel, and other resources than we do. Using said resources,
these companies can implement extensive advertising and promotional campaigns, both generally and in response to specific marketing efforts
by competitors. They can introduce new products to new markets more rapidly. In certain instances, competitors with greater financial
resources may be able to enter a market in direct competition with us, offering attractive marketing tools to encourage the sale of products
that compete with our products or present cost features that consumers may find attractive.
**Our growth strategy is subject to a significant
degree of risk.**
Our
growth strategy through acquisitions involves a significant degree of risk. Some of the companies that we have identified as acquisition
targets or made a significant investment in may not have a developed business or are experiencing inefficiencies and incur losses. Therefore,
we may lose our investment in the event that these companies businesses do not develop as planned or that they are unable to achieve
the anticipated cost efficiencies or reduction of losses.
Further,
in order to implement our growth plan, we have hired additional staff and consultants to review potential investments and implement our
plan. As a result, we have substantially increased our infrastructure and costs. If we fail to quickly find new companies that provide
revenue to offset our costs, we will continue to experience losses. No assurance can be given that our product development and investments
will produce sufficient revenues to offset these increases in expenditures.
**Changes in the U.S. tax and other laws and regulations may adversely
affect our business.**
The U.S. Government may revise
tax laws, regulations or official interpretations in ways that could have a significant adverse effect on our business, including modifications
that could reduce the profits that we can effectively realize from our international operations, or that could require costly changes
to those operations, or the way in which they are structured. For example, the effective tax rates for most U.S. companies reflect the
fact that income earned and reinvested outside the U.S. is generally taxed at local rates, which may be much lower than U.S. tax rates.
If we expand abroad and there are changes in tax laws, regulations or interpretations that significantly increase the tax rates on non-U.S.
income, our effective tax rate could increase and our profits could be reduced. If such increases resulted from our status as a U.S. company,
those changes could place us at a disadvantage to our non-U.S. competitors if those competitors remain subject to lower local tax rates.
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**Our sales and profitability may be affected by changes in economic,
business and industry conditions**.
If the economic climate in
the U.S. or abroad deteriorates, customers or potential customers could reduce or delay their technology investments. Reduced or delayed
technology and entertainment investments could decrease our sales and profitability. In this environment, our customers may experience
financial difficulty, cease operations and fail to budget or reduce budgets for the purchase of our products and professional services.
This may lead to longer sales cycles, delays in purchase decisions, payment and collection, and can also result in downward price pressures,
causing our sales and profitability to decline. In addition, general economic uncertainty and general declines in capital spending in
the information technology sector make it difficult to predict changes in the purchasing requirements of our customers and the markets
we serve. There are many other factors which could affect our business, including:
|
| The introduction and market acceptance of new
technologies, products and services; | |
|
| New competitors and new forms of competition; | |
|
| The size and timing of customer orders (for retail
distributed physical product); | |
|
| The size and timing of capital expenditures by
our customers; | |
|
| Adverse changes in the credit quality of our
customers and suppliers; | |
|
| Changes in the pricing policies of, or the introduction
of, new products and services by us or our competitors; | |
|
| Changes in the terms of our contracts with our
customers or suppliers; | |
|
| The availability of products from our suppliers;
and | |
|
| Variations in product costs and the mix of products
sold. | |
These trends and factors could adversely affect
our business, profitability and financial condition and diminish our ability to achieve our strategic objectives.
**The rights of the holders of common stock may
be impaired by the potential issuance of preferred stock.**
Our certificate of incorporation
gives our Board the right to create new series of preferred stock. As a result, the Board may, without stockholder approval, issue preferred
stock with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest
of the holders of common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized
as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect
the price of our Class A common stock. We may issue shares of preferred stock in the future.
**The requirements of being a public company
may strain our resources, divert managements attention and affect our ability to attract and retain qualified board members.**
We are a public company and
subject to the reporting requirements of the Exchange Act, and the Sarbanes-Oxley Act of 2002. The Exchange Act requires, among other
things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act
requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting.
For example, Section404 of the Sarbanes-Oxley Act requires that our management report on the effectiveness of our internal controls
structure and procedures for financial reporting. Section404 compliance may divert internal resources and will take a significant
amount of time and effort to complete.If we fail to maintain compliance under Section 404, or if our internal control over financial
reporting continues to not be effective as defined under Section404, we could be subject to sanctions or investigations by the NYSE
American, the SEC, or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this could cause
a decline in the market price of our Class A common stock. Any failure of our internal controls could have a material adverse effect on
our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could
harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent
auditors. We may need to hire a number of additional employees with public accounting and disclosure experience in order to meet our ongoing
obligations as a public company, particularly if we become fully subject to Section 404 and its auditor attestation requirements, which
will increase costs. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives
and to meeting the obligations that are associated with being a public company, which may divert attention from other business concerns,
which could have a material adverse effect on our business, financial condition and results of operations.
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| | |
**We have identified material weaknesses in our
internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain
an effective system of internal controls, which may result in material misstatements of our financial statements or cause us to fail to
meet our periodic reporting obligations.**
We are required to comply
with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act). Section 404 requires that
we document and test our internal control over financial reporting and issue managements assessment of our internal control over
financial reporting. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2024. In
making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control Integrated Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial
statements will not be prevented or detected on a timely basis. Based on our assessment, as of December 31, 2024, we concluded that our
internal control over financial reporting contained material weaknesses.
The weakness will not be considered
remediated, however, until the applicable controls operate for a sufficient period of time and our management has concluded, through testing,
that these controls are operating effectively. If we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, the
accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors
to lose confidence in our reported financial information, which could have a negative effect on the trading price of our Class A common
stock. In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased
chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these
requirements, each of which could have a material adverse effect on our business, results of operations and financial condition.
**The elimination of monetary liability against
our directors, officers and employees under law and the existence of indemnification rights for or obligations to our directors, officers
and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.**
Our certificate of incorporation
contains a provision permitting us to eliminate the personal liability of our directors to us and our stockholders for damages for the
breach of a fiduciary duty as a director or officer to the extent provided by Delaware law. We may also have contractual indemnification
obligations under any future employment agreements with our officers. The foregoing indemnification obligations could result in us incurring
substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup.
These provisions and the resulting costs may also discourage us from bringing a lawsuit against directors and officers for breaches of
their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and
officers even though such actions, if successful, might otherwise benefit us and our stockholders.
**We do not anticipate paying cash dividends
on our common stock and, accordingly, stockholders must rely on stock appreciation for any return on their investment.**
We have never declared or
paid cash dividends on our Class A common stock and do not expect to do so in the foreseeable future. The declaration of dividends is
subject to the discretion of our Board and will depend on various factors, including our operating results, financial condition, future
prospects and any other factors deemed relevant by our Board. You should not rely on an investment in our company if you require dividend
income from your investment in our company. The success of your investment will likely depend entirely upon any future appreciation of
the market price of our Class A common stock, which is uncertain and unpredictable. There is no guarantee that our Class A common stock
will appreciate in value.
|
ITEM 1B. | UNRESOLVED STAFF COMMENTS | |
Because we are a smaller reporting company, this
section is not applicable.
|
ITEM 1C. | CYBERSECURITY | |
**Information Security Program:**
The mission of our information
security program is to design, implement, and maintain a comprehensive information security program that protects our systems, services,
and data against unauthorized access, disclosure, modification, damage, and loss. Our information security program is comprised of internal
and external security and technology professionals who work collaboratively to identify, assess, manage, and mitigate cybersecurity risks
and threats across the Company, our subsidiaries, and third-party contractors.
| | 67 | | |
| | |
We recognize the importance
of effectively managing material risks associated with cybersecurity threats, as defined in Item 106(a) of Regulation S-K. Our risk management
program integrates the monitoring and management of these risks and threats and is informed by applicable laws, regulations, industry
standards, and best practices. We continue to invest in information security resources to mature, expand, and adapt our capabilities to
address emerging cybersecurity risks and threats.
Our information security organization
is committed to maintaining a robust and resilient security posture that enables us to protect our assets, maintain our stakeholders'
trust, and support our business's overall success.
**Cybersecurity Risk Management and Strategy**
Our cybersecurity risk management
and strategy are integral components of our comprehensive information security program. They guide our continuous efforts to evaluate
and improve the confidentiality, integrity, and availability of our critical systems, data, and operations.
We have adopted an Information
Security Policy (the Info-Sec Policy) and an Incident Response Plan (the Response Plan) that establish administrative,
physical, and technical controls and procedures to protect sensitive data throughout the Company. These policies also outline processes
to assess, identify, manage, and report cybersecurity risks and incidents. The Info-Sec Policy applies to all persons working for the
Company and any third parties working with us in any capacity.
Our approach to controls and
risk management is informed by applicable laws and regulations, as well as industry standards and best practices. These serve as a guide
to help us identify, assess, and manage cybersecurity controls and risks relevant to our business.
Our cybersecurity risk management
program includes:
|
1. | Identifying cybersecurity risks that could impact our facilities, third-party vendors/partners, operations,
critical systems, information, and broader enterprise information technology environment. Risks are informed by threat intelligence, current
and historical adversarial activity, and industry-specific threats; | |
|
2. | Performing cybersecurity risk assessments to evaluate our readiness if the risks were to materialize; | |
|
3. | Ensuring risk is addressed and tracking any necessary remediation through an action plan; | |
|
4. | Analyzing all third-party vendors for compliance with our internal Info-Sec Policy to assess potential
risks associated with their security controls. We generally require third parties to maintain security controls, notify us promptly of
any data breach or cybersecurity incident that may impact our data, and provide written assurance of corrective actions; and | |
|
5. | Engaging and utilizing a comprehensive suite of security solutions, including enterprise mobility management,
endpoint protection, secure file transfer, and security information and event management to monitor and actively respond to cybersecurity
threats. These solutions work together to secure our endpoints, protect against malware, ensure the safe transfer of files, and provide
our cybersecurity team with the functionality to build alerts on specific use cases that are important and unique to our business. |
|
**Cybersecurity Governance**
Our Board oversees cybersecurity risk as part of its overall risk oversight
function. Our information technology department (the IT Department), which functions as our Information Security Advisory
Team, is responsible for managing our information security program and implementing cybersecurity risk management practices. The IT Department
is led by our Chief Information Officer, who oversees our cybersecurity strategy and ensure its alignment with business objectives.
The IT Department collaborates
with various stakeholders across the organization to identify, assess, and mitigate cybersecurity risks. They regularly monitor and adapt
our information security program to address the evolving threat landscape.
| | 68 | | |
| | |
In the event of a cybersecurity
incident, the IT Department promptly reports the matter to the Executive Committee, which consists of our senior leadership team. The
Executive Committee is responsible for assessing the severity and potential impact of the incident and determining the appropriate course
of action. The Executive Committee keeps the Board informed of significant cybersecurity incidents and provides updates on the overall
status of our cybersecurity program as needed.
This governance structure
ensures that cybersecurity risks are effectively managed by the IT Department, with oversight from the Executive Committee and the Board.
It maintains clear lines of communication and accountability, enabling timely decision-making and response to cybersecurity matters.
In 2023, we did not identify
any cybersecurity threats that have materially affected or are reasonably likely to materially affect our business strategy, results of
operations or financial condition. However, despite our efforts, we may not successfully eliminate all risks from cybersecurity threats
and can provide no assurance that undetected cybersecurity incidents have not occurred.
|
ITEM 2. | PROPERTIES | |
Our corporate headquarters
office utilizes 10,274 square feet of leased office space in Las Vegas, Nevada. Our Las Vegas leases expire in July2026. The annual
base rent under the leases, payable on a monthly basis, was approximately $0.2 million during 2024.
We also lease additional corporate
offices in Costa Mesa, California and New York, New York. Our New York lease expires in December 2030 and our Costa Mesa lease expires
in December 2027. The annual base rent under the leases, payable on a monthly basis, was approximately $0.3 million during 2024.
We own a 617,000 square foot
data center in Dowagiac, Michigan, in which we operate our crypto assets mining operations for Sentinum, in addition to renting commercial
office and warehouse space.
Our TurnOnGreen segment leases
39,965 square feet of office, engineering, laboratory and warehouse space in two locations in Milpitas, California. One of the leases
previously expired and is now on a month-to-month basis, while the remaining lease expires on January 2026. The annual base rent under
the leases, payable on a monthly basis, was approximately $0.7 million during 2024.
Our Energy segment crane rental business leases 27,909 square feet
of commercial buildings and 10 acres of land in Carthage, Texas, Clinton, Oklahoma, Houston, Texas, and Robstown, Texas. Our leases expire
between May 2025 and April 2027. The annual base rent under the leases, payable on a monthly basis, was approximately $0.5 million in
2024.
We currently anticipate that the current leased
space will be sufficient to support our current and foreseeable future needs.
|
ITEM 3. | LEGAL PROCEEDINGS | |
**Litigation Matters**
The Company is involved in
litigation arising from other matters in the ordinary course of business. We are regularly subject to claims, suits, regulatory and government
investigations, and other proceedings involving labor and employment, commercial disputes, and other matters. Such claims, suits, regulatory
and government investigations, and other proceedings could result in fines, civil penalties, or other adverse consequences.
Certain of these outstanding
matters include speculative, substantial or indeterminate monetary amounts. We record a liability when we believe that it is probable
that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and the loss
or range of loss can be estimated, we disclose the reasonably possible loss. We evaluate developments in our legal matters that could
affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses disclosed, and
make adjustments as appropriate. Significant judgment is required to determine both likelihood of there being and the estimated amount
of a loss related to such matters.
| | 69 | | |
| | |
**Arena Litigation**
*Arena Investors, LP (ROI Litigation)*
On May 30, 2024, Arena Investors,
LP (Arena), in its capacity as collateral agent for five noteholders, filed a Complaint (the ROI Complaint)
in the Supreme Court of the State of New York, County of New York against the Company and ROI, in action captioned *Arena Investors,
LP v. Ault Alliance, Inc. and RiskOn International, Inc.*, Index No. 652792/2024.
The ROI Complaint asserts
a cause of action for breach of contract against the Company based on a Guaranty, dated April 27, 2023, and entered into, amongst others,
the Company and Arena, and seeks damages in the amount of in excess of $3.75 million, plus interest, attorneys fees, costs, expenses,
and disbursements.
The ROI Complaint also asserts
a cause of action for breach of contract against ROI based on an alleged breach of that certain Security Agreement, dated April 27, 2023,
and entered into among ROI and Arena. In connection with this cause of action, Arena seeks, among other things, costs and expenses from
the Company and ROI.
On July 31, 2024, the Company
and ROI filed a motion to dismiss seeking to partially dismiss the ROI Complaint, as against the Company, and to dismiss the ROI Compliant,
in its entirety, as against ROI.
On or about January 21, 2025,
the Court entered an order denying the part of the motion which sought partial dismissal of the ROI Complaint, as against Company, and
granting the part of the motion which sought dismissal of the ROI Complaint, in its entirety, as against ROI.
On February 18, 2025, the
Company filed an Answer to the ROI Complaint and asserted numerous affirmative defenses.
Based on the Companys
assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company cannot
reasonably estimate the potential loss or range of loss that may result from this action. Notwithstanding, the Company has recorded the
unpaid portion of the notes. An unfavorable outcome may have a material adverse effect on the Companys business, financial condition
and results of operations.
**Other Litigation Matters**
With respect to our other
outstanding matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either
individually or in aggregate, have a material adverse effect on our business, consolidated financial position, results of operations,
or cash flows. However, the outcome of such matters is inherently unpredictable and subject to significant uncertainties.
|
ITEM 4. | MINE SAFETY DISCLOSURES | |
Not applicable.
****
| | 70 | | |
| | |
****
**PART II**
****
|
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES | |
****
**Market Information**
Our Class A common stock is
listed on the NYSE American under the symbol GPUS.
**Record Holders**
As of April 14, 2025, 1,529,995
shares of our Class A common stock were issued and outstanding and were owned by four holders of record. A number of holders of our Class
A common stock are street name or beneficial holders whose shares of record are held by banks, brokers, and other financial
institutions.
**Dividend Policy**
****
We have not declared or paid
any cash dividends since our inception, and we do not intend to pay any cash dividends in the foreseeable future. The declaration of dividends
in the future, if any, will be at the discretion of our Board and will depend upon our earnings, capital requirements, and financial position.
**Equity Compensation Information**
The
information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Item12
of this Annual Report on Form 10-K.
**Recent Sales of Unregistered Securities**
Not applicable.
**Purchases of Equity Securities by the Issuer and Affiliated Purchasers**
None.
****
|
ITEM 6. | RESERVED | |
****
|
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
**Cautionary Note Regarding Forward-Looking Statements**
This Annual Report on Form
10-K contains forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking
statements. Such forward-looking statements include statements regarding, among others, (a) our expectations about possible business combinations,
(b) our growth strategies, (c) our future financing plans, and (d) our anticipated needs for working capital. Forward-looking statements,
which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words
may, will, should, expect, anticipate, approximate,
estimate, believe, intend, plan, budget, could, forecast,
might, predict, shall or project, or the negative of these words or other variations
on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that
may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements
expressed or implied by any forward-looking statements. These statements may be found in this Annual Report.
| | 71 | | |
| | |
Forward-looking statements
are based on our current expectations and assumptions regarding our business, potential target businesses, the economy and other future
conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks,
and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking
statements as a result of various factors, including, without limitation, the risks outlined under Risk Factors in this
Annual Report, changes in local, regional, national or global political, economic, business, competitive, market (supply and demand) and
regulatory conditions and the following:
|
| Adverse economic conditions; | |
|
| Our ability to effectively execute our business
plan; | |
|
| Inability to raise sufficient additional capital
to operate our business; | |
|
| Our ability to manage our expansion, growth and
operating expenses; | |
|
| Our ability to evaluate and measure our business,
prospects and performance metrics; | |
|
| Our ability to compete and succeed in highly
competitive and evolving industries; | |
|
| Our ability to respond and adapt to changes in
technology and customer behavior; | |
|
| Our ability to protect our intellectual property
and to develop, maintain and enhance a strong brand; and | |
|
| Other specific risks referred to in the section
entitled Risk Factors. | |
We caution you therefore that
you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future
performance. All forward-looking statements speak only as of the date of this Annual Report. We undertake no obligation to update any
forward-looking statements or other information contained herein unless required by law.
Information regarding market
and industry statistics contained in this Annual Report is included based on information available to us that we believe is accurate.
It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis.
Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional
uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. Except as required
by U.S. federal securities laws, we have no obligation to update forward-looking information to reflect actual results or changes in assumptions
or other factors that could affect those statements. See the section entitled *Risk Factors* for a more detailed discussion
of risks and uncertainties that may have an impact on our future results.
In this Annual Report, the
Company, we, us and our refer to Hyperscale Data, Inc., a Delaware corporation
formerly known as Ault Alliance, which was incorporated in September 2017. Hyperscale Data is a diversified holding company pursuing growth
by acquiring undervalued businesses and disruptive technologies with a global impact.
Through our wholly- and majority-owned subsidiaries and strategic investments, we own and operate a data center
at which we mine Bitcoin, and provide mission-critical products that support a diverse range of industries, including a metaverse platform,
crane services, defense, industrial and automotive. In addition, we extend credit to select entrepreneurial businesses through a licensed
lending subsidiary.
We own Ault Capital Group, Inc. (Ault Capital), which
in turn either wholly owns or has a direct controlling interest in, among other entities, (i) Ault Lending, LLC (Ault Lending),
(ii) RiskOn International, Inc., formerly known as BitNile Metaverse, Inc. (ROI), which wholly owns BitNile.com, Inc. (BNC),
(iii) askROI, Inc. (askROI), (iv) Ault Global Real Estate Equities, Inc. (AGREE), (v) Eco Pack Technologies,
Inc. (Eco Pack), (vi) Ault Aviation, LLC (Ault Aviation), (vii) Circle 8 Holdco LLC (Circle 8 Holdco),
which wholly owns Circle 8 Crane Services, LLC (Circle 8), and (viii) TurnOnGreen, Inc. (TurnOnGreen), which
wholly owns TOG Technologies, Inc. and Digital Power Corporation. We consolidate ROI as a variable interest entity.
**Recent Events and Developments**
On November 15, 2024, we announced
the distribution of 5.0 million shares of our Class B Common Stock (the Class B Common Stock) to all holders of our Class
A common stock and Series C Convertible Preferred Stock on an as-converted basis. The record date for this dividend was November 29, 2024,
and the payment date is December 16, 2024. There is currently no public trading market for the Class B Common Stock. While we presently
intend to seek to have the Class B Common Stock listed for trading on the NYSE American within the foreseeable future, there can be no
assurance when, or if, such a listing will occur. The Class B Common Stock is identical to the currently outstanding Class A common stock,
with the exception that each share thereof carries 10 times the voting power of a share of Class A common stock. The Class B Common Stock
is convertible at any time after the payment date into Class A common stock on a one-for-one basis.
On November 20, 2024, pursuant
to the approval provided by our stockholders at the annual meeting of stockholders held on June 28, 2024, we filed an Amendment to our
Certificate of Incorporation with the State of Delaware to effectuate a reverse stock split of our Class A common stock affecting the
issued and outstanding number of such shares by a ratio of one-for-thirty-five. The reverse stock split became effective on November 22,
2024. All share amounts in this Annual Report have been updated to reflect the reverse stock split.
| | 72 | | |
| | |
On November 26, 2024, we announced
the distribution of 1.0 million shares of our Series F Exchangeable Preferred Stock (Series F Preferred Stock) to holders
of Class A common stock and Series C Convertible Preferred Stock on an as-converted basis. The record date for this dividend was December
13, 2024, and the payment date was December 23, 2024. The Series F Preferred Stock has a $1.00 liquidation preference and will not pay
a dividend. Each share of Series F Preferred Stock will be exchangeable, at the option of its holder, for (i) 10 shares of Class A Common
Stock of Ault Capital and (ii) five shares of Class B Common Stock of Ault Capital, at any time beginning on the later of (i) one year
after issuance of the Series F Preferred Stock and (ii) the date of the registration under the Securities Act of 1933, as amended, of
all of the foregoing shares of Ault Capital Class A Common Stock and Ault Capital Class B Common Stock. Once the Series F Preferred Stock
has been exchanged into shares of Ault Capital Class A Common Stock and Class B Common Stock, our sole business will be our ownership
of Sentinum, Inc. through which we operate our Bitcoin mining business as well as its HPC and AI operations.
On December 13, 2024 (the
Closing Date), Third Avenue Apartments LLC (Third Avenue), which was a subsidiary of AGREE, completed the
sale of its real property located at the southeast corner of 5th Street North and 3rd Avenue North in St. Petersburg, Florida (the Property).
The Property was sold on the Closing Date to Cats Mirror Lake, LLC (the Buyer) pursuant to a contract of sale, as amended
entered into by Third Avenue and the Buyer. The sale price for the property was $13.0 million. In February 2025, Third Avenue filed a
certificate of cancellation with the Delaware Secretary of State.
On December 21, 2024, we entered
into a securities purchase agreement (the December 2024 SPA) with Ault & Company, pursuant to which we agreed to sell,
in one or more closings, to Ault & Company up to 25,000 shares of Series G convertible preferred stock (Series G Preferred
Stock) and warrants to purchase up to 4.2 million shares of Class A common stock (the Series G Warrants) for a total
purchase price of up to $25.0 million. The December 2024 SPA provides that the financing may be conducted through one or more closings.
Through April 14, 2025, pursuant to the December 2024 SPA, we have sold to Ault & Company 960 shares of Series G Preferred Stock and
Series G Warrants to purchase 162,217 shares of Class A common stock, for a purchase price of $1.0 million.
Each share of Series G Preferred
Stock has a stated value of $1,000.00 and is convertible into shares of Class A common stock at a conversion price equal to the greater
of (i) $0.10 per share, and (ii) the lesser of (A) $6.74 or (B) 105% of the volume weighted average price of the Class A common stock
during the 10 trading days immediately prior to the date of conversion. The holders of Series G Preferred Stock are entitled to cumulative
cash dividends at an annual rate of 9.5%, or $95.00 per share, based on the stated value per share. Dividends shall accrue for 10 years
from the date of issuance of such shares of Series G Preferred Stock and are payable monthly in arrears. For the first two years, we may
elect to pay the dividend amount in shares of Class A common stock rather than cash. The holders of the Series G Preferred Stock are entitled
to vote with the Class A common stock as a single class on an as-converted basis.
On March 28, 2025, our
majority owned subsidiary, Avalanche International Corp. (AVLP), filed a petition
for liquidation under Chapter 7 of the bankruptcy laws. The filing placed AVLP under the control of the bankruptcy court, which will oversee
its liquidation. As a result, we no longer consider AVLP as a subsidiary of ours.
On March 31, 2025, we entered
into a securities purchase agreement with an institutional investor pursuant to which we agreed to sell up to 50,000 shares of Series
B Convertible Preferred Stock (Series B Preferred Stock) for a total purchase price of up to $50.0 million. The securities
purchase agreement provides that the transaction shall be conducted through 49 separate tranche closings, provided, however, that the
investor has the ability, exercisable in its sole discretion, to purchase any number of shares of Series B Preferred Stock prior to the
dates of the tranche closings provided for in the securities purchase agreement. The initial tranche closing, which will close promptly
after the investor has converted out of the Exchange Note, will consist of the sale and issuance to the investor of 2,000 shares of Series
B Preferred Stock for an aggregate of $2.0 million. Pursuant to the securities purchase agreement, provided certain closing conditions
have been met, the investor shall purchase up to 4,800 shares of Series B Preferred Stock on a monthly basis, with the investor being
required to purchase 1,000 shares per month.
Each share of Series B Preferred
Stock has a stated value of $1,000.00 and is convertible into shares of Class A common stock at a at a conversion price equal the lesser
of a 25% discount to our volume weighted average price during the five trading days immediately prior to (A) the date of execution of
the securities purchase agreement or (B) the date of conversion into shares of Class A common stock, but not greater than $10.00 per share.
Notwithstanding the foregoing, in no event shall the Series B Preferred Stock be convertible at less than the Floor Price. The holders
of Series B Preferred Stock are entitled to cumulative cash dividends at an annual rate of 15%, or $150.00 per share, based on the stated
value per share. Dividends shall accrue for as long as any shares of Series B Preferred Stock remain issued and outstanding and are payable
monthly in arrears. For the first two years, we may elect to pay the dividend amount in additional shares of Series B Preferred Stock
rather than cash. The holders of the Series B Preferred Stock are entitled to vote with the Class A common stock as a single class on
an as-converted basis.
| | 73 | | |
| | |
**Presentation of GIGA as Discontinued Operations**
On
August 14, 2024, our majority owned subsidiary, Gresham Worldwide, Inc. (GIGA), filed
a petition for reorganization under Chapter 11 of the bankruptcy laws. The filing placed GIGA under the control of the bankruptcy court,
which oversees its reorganization and restructuring process. We assessed the inherent uncertainties associated with the outcome of the
Chapter 11 reorganization process and the anticipated duration thereof, and concluded that it was appropriate to deconsolidate GIGA and
its subsidiaries effective on the petition date. We recognized a gain on deconsolidation of GIGA of $2.0 million during the year ended
December 31, 2024, which is included in net gain (loss) from discontinued operations.
In connection with the Chapter
11 reorganization process, we concluded that the operations of GIGA met the criteria for discontinued operations as this strategic
shift will have a significant effect on our operations and financial results. As a result, we have presented the results of operations,
cash flows and financial position of GIGA as discontinued operations in the accompanying consolidated financial statements and notes for
all periods presented.
**Change in Plan of Sales of AGREE Hotel Properties**
On April 30, 2024, we had
a change in plan of sale for our four hotels owned and operated by AGREE. As a result, as of April 30, 2024, the assets no longer met
the held for sale criteria and were required to be reclassified as held and used at the lower of adjusted carrying value or the fair value
at the date of the not to sell.
For presentation purposes,
the assets and liabilities previously held for sale as of December 31, 2023, were reclassified in the December 31, 2023 balance sheet
in the accompanying financial statements back to their original asset and liability groups at their previous carrying values. In connection
with this change in plan of sale, we recorded a loss on impairment of property and equipment related to the real estate assets of AGREE
of $8.0 million during the year ended December 31, 2024.
**General**
As a holding company, our
business objective is to increase stockholder value through developing and growing our subsidiaries. Under the strategy we have adopted,
we are focused on managing and financially supporting our existing subsidiaries and partner companies, with the goal of pursuing monetization
opportunities and maximizing the value returned to stockholders. We have, are and will consider initiatives including, among others: public
offerings, the sale of individual partner companies, the sale of certain or all partner company interests in secondary market transactions,
or a combination thereof, as well as other opportunities to maximize stockholder value. We anticipate returning value to stockholders
after satisfying our debt obligations and working capital needs.
From time to time, we engage
in discussions with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of
a process we initiate. To the extent we believe that a subsidiary or partner companys further growth and development can best be
supported by a different ownership structure or if we otherwise believe it is in our stockholders best interests, we will seek
to sell all or a portion of our position in the subsidiary or partner company. These sales may take the form of privately negotiated sales
of stock or assets, mergers and acquisitions, public offerings of the subsidiary or partner companys securities and, in the case
of publicly traded partner companies, sales of their securities in the open market. Our plans may include taking subsidiaries or partner
companies public through rights offerings and directed share subscription programs. We will continue to consider these (or similar) initiatives
and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize value for our stockholders.
In recent years, we have provided
capital and relevant expertise to fuel the growth of businesses in AI software platform, social gaming platform, equipment rental services,
defense, industrial and hotel operations. We have provided capital to subsidiaries as well as partner companies in which we have an equity
interest or may be actively involved, influencing development through board representation and management support.
We are a Delaware corporation
with our corporate office located at 11411 Southern Highlands Pkwy, Suite 190, Las Vegas, NV 89141. Our phone number is 949-444-5464 and
our website address is https://hyperscaledata.com/.
****
| | 74 | | |
| | |
**Results of Operations**
*Results of Operations for the Years ended December 31, 2024 and
2023*
The following table summarizes
the results of our operations for the years ended December 31, 2024 and 2023.
|
| |
For the Year Ended December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Revenue, crane operations | |
$ | 47,475,000 | | |
$ | 49,198,000 | | |
|
Revenue, crypto assets mining | |
| 30,598,000 | | |
| 33,107,000 | | |
|
Revenue, hotel and real estate operations | |
| 18,891,000 | | |
| 17,577,000 | | |
|
Revenue, lending and trading activities | |
| 1,893,000 | | |
| (1,998,000 | ) | |
|
Revenue | |
| 7,805,000 | | |
| 36,962,000 | | |
|
Total revenue | |
| 106,662,000 | | |
| 134,846,000 | | |
|
Cost of revenue, crane operations | |
| 30,745,000 | | |
| 29,971,000 | | |
|
Cost of revenue, crypto assets mining | |
| 34,338,000 | | |
| 36,446,000 | | |
|
Cost of revenue, hotel and real estate operations | |
| 12,928,000 | | |
| 12,300,000 | | |
|
Cost of revenue, lending and trading activities | |
| (1,205,000 | ) | |
| 1,180,000 | | |
|
Cost of revenue, products | |
| 5,639,000 | | |
| 30,165,000 | | |
|
Total cost of revenue | |
| 82,445,000 | | |
| 110,062,000 | | |
|
Gross profit | |
| 24,217,000 | | |
| 24,784,000 | | |
|
Operating expenses | |
| | | |
| | | |
|
Research and development | |
| 11,011,000 | | |
| 4,418,000 | | |
|
Selling and marketing | |
| 14,019,000 | | |
| 31,653,000 | | |
|
General and administrative | |
| 35,245,000 | | |
| 68,200,000 | | |
|
Impairment of property and equipment | |
| 19,446,000 | | |
| 26,445,000 | | |
|
Impairment of goodwill and intangible assets | |
| 1,500,000 | | |
| 42,880,000 | | |
|
Impairment of mined crypto assets | |
| - | | |
| 489,000 | | |
|
Total operating expenses | |
| 81,221,000 | | |
| 174,085,000 | | |
|
Loss from operations | |
| (57,004,000 | ) | |
| (149,301,000 | ) | |
|
Other income (expense): | |
| | | |
| | | |
|
Interest and other income | |
| 2,236,000 | | |
| 4,444,000 | | |
|
Interest expense | |
| (19,671,000 | ) | |
| (44,314,000 | ) | |
|
Other expense, guarantee | |
| - | | |
| (35,400,000 | ) | |
|
Gain on conversion of investment in equity securities to marketable equity securities | |
| 17,900,000 | | |
| - | | |
|
Gain (loss) on extinguishment of debt | |
| 2,981,000 | | |
| (7,322,000 | ) | |
|
Loss on extinguishment of debt, related party | |
| - | | |
| (4,164,000 | ) | |
|
Loss from investment in unconsolidated entity | |
| (1,958,000 | ) | |
| (302,000 | ) | |
|
Loss on deconsolidation of subsidiary | |
| - | | |
| (3,040,000 | ) | |
|
Impairment of equity securities | |
| (6,266,000 | ) | |
| (9,555,000 | ) | |
|
Change in fair value of warrant liability | |
| - | | |
| 6,319,000 | | |
|
Gain on the sale of fixed assets | |
| 79,000 | | |
| 2,069,000 | | |
|
Total other expense, net | |
| (4,699,000 | ) | |
| (91,265,000 | ) | |
|
Loss before income taxes | |
| (61,703,000 | ) | |
| (240,566,000 | ) | |
|
Income tax provision | |
| 56,000 | | |
| 348,000 | | |
|
Net loss from continuing operations | |
| (61,759,000 | ) | |
| (240,914,000 | ) | |
|
Net loss from discontinued operations | |
| (779,000 | ) | |
| (12,355,000 | ) | |
|
Net loss | |
| (62,538,000 | ) | |
| (253,269,000 | ) | |
|
Net loss attributable to non-controlling interest | |
| 6,334,000 | | |
| 22,242,000 | | |
|
Net loss attributable to Hyperscale Data, Inc. | |
| (56,204,000 | ) | |
| (231,027,000 | ) | |
|
Preferred dividends | |
| (5,277,000 | ) | |
| (1,375,000 | ) | |
|
Net loss available to common stockholders | |
$ | (61,481,000 | ) | |
$ | (232,402,000 | ) | |
|
Comprehensive loss | |
| | | |
| | | |
|
Net loss available to common stockholders | |
$ | (61,481,000 | ) | |
$ | (232,402,000 | ) | |
|
Other comprehensive loss | |
| | | |
| | | |
|
Foreign currency translation adjustment | |
| (66,000 | ) | |
| (698,000 | ) | |
|
Other comprehensive income | |
| (66,000 | ) | |
| (698,000 | ) | |
|
Total comprehensive loss | |
$ | (61,547,000 | ) | |
$ | (233,100,000 | ) | |
| | 75 | | |
| | |
**
*Revenues*
Revenues by segment for the
years ended December 31, 2024 and 2023 were as follows:
|
| |
For the Year Ended December 31, | | |
Increase | | |
| | |
|
| |
2024 | | |
2023 | | |
(Decrease) | | |
% | | |
|
Sentinum | |
| | |
| | |
| | |
| | |
|
Revenue, crypto assets mining | |
$ | 30,598,000 | | |
$ | 33,107,000 | | |
$ | (2,509,000 | ) | |
| -8 | % | |
|
Revenue, commercial real estate leases | |
| 876,000 | | |
| 1,416,000 | | |
| (540,000 | ) | |
| -38 | % | |
|
Energy | |
| | | |
| | | |
| | | |
| | | |
|
Revenue, crane operations | |
| 47,475,000 | | |
| 49,198,000 | | |
| (1,723,000 | ) | |
| -4 | % | |
|
Other | |
| 116,000 | | |
| 130,000 | | |
| (14,000 | ) | |
| -11 | % | |
|
AGREE | |
| 18,015,000 | | |
| 16,161,000 | | |
| 1,854,000 | | |
| 11 | % | |
|
SMC | |
| - | | |
| 31,557,000 | | |
| (31,557,000 | ) | |
| -100 | % | |
|
TurnOnGreen | |
| 4,913,000 | | |
| 4,201,000 | | |
| 712,000 | | |
| 17 | % | |
|
Fintech | |
| | | |
| | | |
| | | |
| | | |
|
Revenue, lending and trading activities | |
| 1,893,000 | | |
| (1,998,000 | ) | |
| 3,891,000 | | |
| n/m | | |
|
ROI | |
| 253,000 | | |
| 305,000 | | |
| (52,000 | ) | |
| -17 | % | |
|
Other | |
| 2,523,000 | | |
| 769,000 | | |
| 1,754,000 | | |
| 228 | % | |
|
Total revenue | |
$ | 106,662,000 | | |
$ | 134,846,000 | | |
$ | (28,184,000 | ) | |
| -21 | % | |
n/m - not meaningful
Sentinum
Revenues from Sentinums
crypto assets mining operations decreased $2.5 million to $30.6 million for the year ended December 31, 2024, compared to $33.1 million
for the year ended December 31, 2023. The decrease was due primarily to a $4.1 million decline in revenue from mined crypto assets at
Sentinum owned and operated facilities, partially offset by a $1.6 million increase in revenue from Sentinum crypto mining equipment hosted
at third-party facilities. The $4.1 million decrease in revenue from mined crypto assets at Sentinum owned and operated facilities was
due to the April 2024 Bitcoin halving event that occurred on the Bitcoin network and a 70% increase in the average Bitcoin mining difficulty
level, partially offset by a 129% increase in the average Bitcoin price for the year ended December 31, 2024, compared to the corresponding
period in 2023.
Energy
Energy revenues from Circle 8s crane operations decreased by
$1.7 million, or 4%, for the year ended December 31, 2024, remaining essentially flat compared to the prior period. This decrease was
primarily due to competitive pricing pressures and lower utilization of the crane fleet, as five cranes were out of service during the
year ended December 31, 2024.
Fintech
Revenues
from our lending and trading activities were $1.9 million for the year ended December 31, 2024, driven primarily by $2.4 million in realized
gains from trading activities and $2.7 million in fee income, partially offset by a $0.6 million unrealized loss from our investment in
Alzamend and a $2.4 million impairment for equity securities that did not have readily determinable fair values related to Fintech lending
operations. In comparison, revenues from lending and trading activities for the same period in 2023 were negative $2.0 million, driven
primarily by a $5.6 million unrealized loss from our investment in Alzamend and a $6.2 million impairment for equity securities that did
not have readily determinable fair values related to Fintech lending operations, partially offset by $11.0 million in net realized and
unrealized gains on investments in marketable equity securities.
Revenues
from our trading activities for the year ended December 31, 2024 included net gains on equity securities, including unrealized gains and
losses from market price changes. These gains and losses have caused, and will continue to cause, significant volatility in our periodic
earnings.
| | 76 | | |
| | |
SMC
Due
to the significant change in our ownership and voting rights, we determined that we no longer met the criteria of the primary beneficiary
and, accordingly, we deconsolidated SMC as of November 20, 2023. SMC revenues were $0 for the year ended December 31, 2024, a decrease
of $31.6 million compared to the corresponding period in 2023.
TurnOnGreen
TurnOnGreens revenues
increased by $0.7 million, to $4.9 million for the year ended December 31, 2024, compared to $4.2 million in the corresponding period
in 2023. This rise was primarily due to higher sales from a single, higher-margin customer in the defense industry during the year ended
December 31, 2024.
Other
Other revenues increased by
$1.8 million, to $2.5 million for the year ended December 31, 2024, compared to $0.8 million in the corresponding period in 2023. This
rise was primarily due to higher corporate aircraft charter revenue from third parties.
*Gross Margins*
Gross margins rose to 23%
for the year ended December 31, 2024, compared to 18% for the same period in 2023. This increase was influenced by our lending and trading
activities, which contributed favorably to our gross margins for the year ended December 31, 2024 and unfavorably to our gross margins
for the year ended December 31, 2023. In both periods, gross margins were adversely affected by negative margins from our crypto assets
mining operations. Excluding the impacts of both our lending and trading activities and our crypto assets mining operations, adjusted
gross margins for the year ended December 31, 2024, and 2023 would have been 34% and 30%, respectively. Gross margins improved due to
the deconsolidation of the lower margin of SMCs business.
*Research and Development*
Research and development expenses
increased by $6.6 million to $11.0 million for the year ended December 31, 2024, from $4.4 million in the prior corresponding period,
due to increased expenditures primarily related to development work on ROIs social gaming platform and askROIs AI-powered
platform.
*Selling and Marketing*
Selling and marketing expenses were $14.0 million for the year ended
December 31, 2024, compared to $31.7 million for the year ended December 31, 2023, a decrease of $17.6 million, or 56%. The decrease was
primarily the result of a $14.1 million decrease in sales and marketing expenses at ROI primarily due to lower advertising and promotion
costs and a $3.3 million decrease in sales and marketing expenses from SMC due to the deconsolidation
of SMC as of November 20, 2023.
*General and Administrative*
General and administrative
expenses were $35.2 million for the year ended December 31, 2024, compared to $68.2million for the year ended December 31, 2023,
a decrease of $33.0 million, or 48%. General and administrative expenses decreased from the comparative prior period, mainly due to the
following:
|
| $11.2 million decrease in general and administrative expenses from SMC due to the deconsolidation
of SMC as of November 20, 2023; | |
|
| $6.3 million lower professional fees; | |
|
| $5.7 million lower performance bonus related to realized gains on trading activities; | |
|
| $5.1 million lower stock compensation expense; and | |
|
| $5.1 million lower salaries and benefits. | |
| | 77 | | |
| | |
*Impairment of Goodwill and Intangible Assets*
Impairment of Intangible Assets
During
the year ended December 31, 2024, we recognized $1.5 million impairment of intangible assets related to Eco Pack. During the year ended
December 31, 2023, we recognized $24.7 million impairment of intangible assets related to AVLP.
Impairment of AVLP Goodwill
We test the recorded amount
of goodwill for impairment on an annual basis on December 31 or more frequently if there are indicators that the carrying amount of the
goodwill exceeds its carried value. We performed a goodwill impairment test as of June 30, 2023 related to AVLP as there were indicators
of impairment related to certain unforeseen business developments and changes in financial projections.
The valuation of the AVLP
reporting unit was determined using a market and income approach methodology of valuation. The income approach was based on the projected
cash flows discounted to their present value using discount rates, that in our judgment, consider the timing and risk of the forecasted
cash flows using internally developed forecasts and assumptions. Under the income approach, the discount rate used is the average estimated
value of a market participants cost of capital and debt, derived using customary market metrics. The analysis included assumptions
regarding AVLPs revenue forecast and discount rates of 26.7% using a weighted average cost of capital analysis. The market approach
utilized the guideline public company method.
The results of the quantitative test indicated that the fair value
of the AVLP reporting unit did not exceed its carrying amounts, including goodwill, in excess of the carrying value of the goodwill. As
a result, the entire $18.6 million carrying amount of AVLPs goodwill was recognized as a non-cash impairment charge during the
year ended December 31, 2023.
*Impairment of Property and Equipment*
During the year ended December
31, 2024, due to increases in the Bitcoin mining difficulty level, which compounded the continued impact of the Bitcoin halving event,
we concluded that indicated that an impairment triggering event had occurred. Testing performed indicated the estimated fair value of
our miners to be less than their net carrying value and an impairment charge of $10.5million was recognized, decreasing the net
carrying value of our crypto assets mining equipment to their estimated fair value.
In addition, we recorded $8.9
million in impairment charges related to real estate assets of AGREE during the year ended December 31, 2024.
During the year ended December 31, 2023, certain unforeseen business
developments and changes in financial projections at AVLP indicated that an impairment triggering event had occurred. Testing performed
indicated the estimated fair value of AVLP property and equipment as of December 31, 2023 was $0, and an impairment charge of $14.0 million
was recognized. During the year ended December 31, 2023, we recognized an impairment charge of $4.1 million related to property and equipment
at ROI.
*Impairment of Mined Digital Currencies*
Impairment of mined digital
currencies for the year ended December 31, 2023 was $0.5 million.
*Other Income (Expense), Net*
Other expense, net was $4.7
million for the year ended December 31, 2024, compared to other expense, net of $91.3million for the year ended December 31, 2023.
Interest and other income
was $2.2 million for the year ended December 31, 2024, compared to $4.4 million for the year ended December 31, 2023. The decrease in
interest and other income is primarily due to the decline in Ault Disruptives interest income as a result of the decline in cash
and marketable securities held in the trust account as a result of redemptions of Ault Disruptive common stock subject to possible redemption.
Interest expense was $19.7
million for the year ended December 31, 2024, compared to $44.3 million for the year ended December 31, 2023. Interest expense for the
year ended December 31, 2024 included contractual interest of $11.9 million, amortization of debt discount of $5.5 million, and forbearance
and extension fees of $2.2 million. Interest expense for the year ended December 31, 2023 included amortization of debt discount of $21.5
million, contractual interest of $17.3 million and forbearance and extension fees of $5.5 million.
| | 78 | | |
| | |
Other expense, guarantee was
$0 for the year ended December 31, 2024, compared to $35.4 million for the year ended December 31, 2023. Pursuant to our financial guarantee
obligation related to our December 2023 issuance of Series C preferred stock, related party, we recorded a guarantee liability of $38.9
million using the practical expedient to fair value as set forth in ASC 460-10-30-2(a) and recorded other expense, guarantee of $35.4
million (the amount of the guarantee liability, less $3.5 million restricted cash related to the guarantee obligation).
Gain on conversion of investment
in equity securities to marketable equity securities of $17.9 million relates to ROI conversion of White River common stock. During the
year ended December 31, 2024, ROI transferred 14.5 million shares of White River common stock with a fair value of $19.2 million at the
date of transfer. In conjunction with the transfers, ROI converted a portion of their White River Series A convertible preferred stock
into White River common stock and recorded a noncash $17.9 million gain on conversion. No such gains were recognized during the year ended
December 31, 2023.
During the year ended December
31, 2024, ROI converted $2.3 million of ROI senior secured convertible notes that had a fair value of $0.9 million at the time of conversion
and recognized a $1.4 million gain on extinguishment of debt. During the year ended December 31, 2024, holders of our convertible notes
converted $2.0 million of convertible notes that had a fair value of $2.7 million at the time of conversion and recognized a $0.7 million
loss on extinguishment of debt.
During the year ended December
31, 2024, an investor converted $1.2 million of a convertible note into 0.2 million shares of Class A common stock that had a fair value
of $1.5 million at the time of conversion and we recognized a $0.3 million loss on extinguishment of debt.
Loss from investment in unconsolidated
entity was $2.0 million for the year ended December 31, 2024, representing our share of losses from our equity method investment in SMC.
Cumulative downward adjustments
for impairments for our equity securities without readily determinable fair values held at were $6.3 million for the year ended December
31, 2024, compared to $9.6 million for the year ended December 31, 2023.
*Income Tax Provision*
Provision for income taxes
was $0.1 million and 0.3 million for the years ended December 31, 2024 and 2023, respectively. The effective income tax provision rate
was 0.1% for both of the years ended December 31, 2024 and 2023.
**Liquidity and Capital Resources**
On December 31, 2024, we had
cash and cash equivalents of $4.6 million (excluding restricted cash of $20.5 million), compared to cash and cash equivalents of $6.1
million (excluding restricted cash of $5.0 million) at December 31, 2023. The increase in cash and cash equivalents was primarily due
to cash provided by financing activities related to the sale of common and preferred stock, as well as proceeds from notes payable and
convertible notes, partially offset by the payment of debt, purchases of property and equipment and cash used in operating activities.
Net cash used in operating
activities totaled $19.4 million for the year ended December 31, 2024, compared to $5.4million for the year ended December 31, 2023.
Cash used in operating activities for the year ended December 31, 2024 included $25.4 million proceeds from the sale of crypto assets
from our Sentinum crypto assets mining operations, offset by operating losses and changes in working capital. Net cash used in operating
activities for the year ended December 31, 2024 included $6.4 million cash used in operating activities from discontinued operations.
Net cash provided by investing
activities was $3.2 million for the year ended December 31, 2024, compared to net cash used in investing activities of $29.5 million for
the year ended December 31, 2023. Net cash provided by investing activities for the year ended December 31, 2024 included proceeds from
the sale of real property located in St. Petersburg, Florida for $13.0 million, partially offset by capital expenditures of $4.8million
and investments in loans receivable of $1.0 million. Net cash provided by investing activities for the year ended December 31, 2024 included
$3.8 million cash used in investing activities from discontinued operations.
| | 79 | | |
| | |
Net cash provided by financing
activities was $25.8 million for the year ended December 31, 2024, compared to $37.0million for the year ended December 31, 2023,
and primarily reflects the following transactions:
|
| During the period between January 1, 2024 through March 13, 2024,
we sold an aggregate of 0.7 million shares of common stock pursuant to an At-The-Market issuance sales agreement for gross proceeds of
$14.6 million; | |
|
| $60.9 million gross proceeds from notes payable, offset by $60.2 million payments on notes payable; | |
|
| $6.7 million gross proceeds from convertible notes payable, partially offset by $1.3 million payments
on convertible notes payable; | |
|
| $8.0 million gross proceeds from sales of Series C preferred stock,
related party; | |
|
| $1.9 million gross proceeds from subsidiaries sale of stock
to non-controlling interests; | |
|
| $5.3 million payments of preferred dividends; and | |
|
| $1.9 million payments on notes payable, related party. | |
Net cash provided by financing
activities for the year ended December 31, 2024 included $2.6 million cash provided by financing activities from discontinued operations.
**Financing Transactions Subsequent to December
31, 2024**
*Sales of Series G Preferred Stock and Warrants*
Between January
and April 2025, we sold to Ault & Company an aggregate of 960 shares of Series G Preferred Stock and Series G Warrants to purchase
an aggregate of 0.2 million shares of Class A common stock, for an aggregate purchase price of $1.0 million.
*Issuances of Series D Preferred Stock*
From January 1, 2025 through
April 14, 2025, we issued a total of 135,957 shares of our Series D preferred stock for the settlement of ELOC advances totaling $2.0
million.
*OID Only Term Note*
On January 14, 2025, we entered
into a term note agreement with institutional investors for $2.5 million. The term note was issued at a discount, with net proceeds to
us of $2.2 million. The term note does not accrue any interest. The term note was scheduled to mature on March 1, 2025. The term note
is guaranteed by Mr. Ault.
*15% Promissory Note*
On March 7, 2025, we entered
into a promissory note agreement with an institutional investor with a principal amount of $0.5million and an interest rate of 15%.
The maturity date of the promissory note is December 7, 2025. Mr. Ault entered into a personal guaranty agreement for the benefit of the
investor.
*Convertible Promissory Note*
On March 21, 2025 we entered
into an exchange agreement with SJC Lending, LLC, a Delaware limited liability company (SJC), pursuant to which we issued
to SJC a convertible promissory note in the principal face amount of $4.9 million (the Note) in exchange for the cancellation
of the following notes we issued to Steve J. Caspi, the sole member of SJC, who transferred such notes to SJC, (i) a term note issued
on January 14, 2025 in the principal face amount of $2.5 million, (ii) a promissory note issued on March 7, 2025 in the principal face
amount of $0.5 million, (iii) a promissory note issued on March 12, 2025 in the principal face amount of $1.5million and (iv) a
promissory note issued on March 13, 2025 in the principal face amount of $0.3 million.
| | 80 | | |
| | |
The Note accrues interest
at the rate of 15% per annum, unless an event of default (as defined in the Note) occurs, at which time the Note would accrue interest
at 18% per annum. The Note will mature on December 31, 2025. The Note is convertible into shares of Class A common stock at any time after
NYSE American (NYSE) approval of the Supplemental Listing Application (the SLAP) at a conversion price equal
to the greater of (i) $0.40 per share (the Note Floor Price), which Note Floor Price shall not be adjusted for stock dividends,
stock splits, stock combinations and other similar transactions and (ii) the lesser of 75% of the VWAP (as defined in the Note) of the
Class A common stock during the five trading days immediately prior to (A) the date of issuance of the Note or (B) the date of conversion
into shares of Class A common stock, but not greater than $10.00 per share (the Maximum Price), which Maximum Price shall
be adjusted for stock dividends, stock splits, stock combinations and other similar transactions.
*Series B Convertible Preferred Stock Securities
Purchase Agreement*
On March 31, 2025, we entered
into a securities purchase agreement with an institutional investor pursuant to which we agreed to sell up to 50,000 shares of Series
B Convertible Preferred Stock (Series B Preferred Stock) for a total purchase price of up to $50 million. The securities
purchase agreement provides that the transaction shall be conducted through 49 separate tranche closings, provided, however, that the
investor has the ability, exercisable in its sole discretion, to purchase any number of shares of Series B Preferred Stock prior to the
dates of the tranche closings provided for in the securities purchase agreement. The initial tranche closing, which will close promptly
after the investor has converted out of the Exchange Note, will consist of the sale and issuance to the investor of two thousand (2,000)
shares of Series B Preferred Stock for an aggregate of $2 million. Pursuant to the securities purchase agreement, provided certain closing
conditions have been met, the investor shall purchase up to four thousand, eight hundred (4,800) shares of Series B Preferred Stock on
a monthly basis, with the investor being required to purchase one thousand (1,000) shares per month.
Each share of Series B Preferred
Stock has a stated value of $1,000.00 and is convertible into shares of Class A common stock at a at a conversion price equal the lesser
of a 25% discount to our volume weighted average price during the five trading days immediately prior to (A) the date of execution of
the securities purchase agreement or (B) the date of conversion into shares of Class A common stock, but not greater than $10.00 per share.
Notwithstanding the foregoing, in no event shall the Series B Preferred Stock be convertible at less than the Floor Price. The holders
of Series B Preferred Stock are entitled to cumulative cash dividends at an annual rate of 15%, or $150.00 per share, based on the stated
value per share. Dividends shall accrue for as long as any shares of Series B Preferred Stock remain issued and outstanding and are payable
monthly in arrears. For the first two years, we may elect to pay the dividend amount in additional shares of Series B Preferred Stock
rather than cash. The holders of the Series B Preferred Stock are entitled to vote with the Class A common stock as a single class on
an as-converted basis.
**
*Short-Term OID Promissory Notes*
Between March 21, 2025 and
April 2, 2025, we entered into term note agreements with an institutional investor for an aggregate of $0.6 million. The term notes were
issued at a 15% discount, with net proceeds to us of $0.6 million. The term notes accrue interest at the rate of 24% per annum. The term
notes mature on April 30, 2025.
*April 2025 Convertible Promissory Note*
On April 1, 2025, we issued
to an institutional investor, a convertible promissory note in the principal face amount of $1.7 million (the April 2025 Note)
in consideration for an advance of $1.5 million previously made by the investor to us (the Transaction). The April 2025
Note has a principal face amount of $1.7 million and was issued with an OID of 10%. The April 2025 Note accrues interest at the rate of
15% per annum, unless an event of default (as defined in the April 2025 Note) occurs, at which time the April 2025 Note would accrue interest
at 18% per annum. The April 2025 Note will mature on September 30, 2025. The April 2025 Note is convertible into shares of our class A
common stock at any time after NYSE approval of the SLAP at a conversion price equal to the greater of (i) $0.40 per share, which shall
not be adjusted for stock dividends, stock splits, stock combinations and other similar transactions and (ii) the lesser of 75% of the
VWAP (as defined in the April 2025 Note) of the Class A common stock during the five trading days immediately prior to the closing date
or the date of conversion.
*April 2025 Convertible Note*
On April 8, 2025, we issued
to an accredited investor a convertible promissory note in the principal face amount of $110,000 in consideration for $100,000. The note
accrues interest at the rate of 15% per annum, unless an event of default (as defined in the note) occurs, at which time the note would
accrue interest at 18% per annum. The note will mature on September 30, 2025. The note is convertible into shares of Class A common stock
at a conversion price equal to the greater of (i) $0.45and (ii) the lesser of (A) 75% of the VWAP (as defined in the note) of the
Class A common stock during the five trading days immediately prior to the date of issuance of the note or (B) 75% of the lowest daily
VWAP of the Class A common stock during the five trading days immediately prior to the date of conversion into shares of Class A common
stock.
| | 81 | | |
| | |
**Deficiency Letter from the NYSE American**
We were notified by the NYSE
American on December 18, 2024 that due to our disclosure in our Form 10-Q filed for the fiscal period ended September 30, 2024, which
reported stockholders equity of approximately $2.2 million, we no longer meet the requirement that we must have no less than $6
million or more in stockholders equity pursuant to the listing standard set forth under Section 1003(a)(ii) and (iii) of the NYSE
American Company Guide (the Listing Standards) because we have reported losses from continuing operations and/or net losses
in five of its most recent fiscal years ended December 31, 2023.
Under the applicable NYSE
American listing rules, we were required by January 17, 2025 to submit a compliance plan that demonstrates how we intend to regain compliance
with the Listing Standards within 18 months of the receipt of the notice, or June 18, 2026. The compliance plan was submitted to the NYSE
American on January 17, 2025. We, at the request of the NYSE American, provided supplements to the original compliance plan. On March
4, 2025, the NYSE American accepted the compliance plan and granted us a listing extension until June 18, 2026. We will be subject to
periodic reviews including quarterly monitoring for compliance with the plan. Failure to make progress consistent with the plan or to
regain compliance with the continued Listing Standards by the end of the extension period could result in us being delisted from the NYSE
American.
**Critical Accounting Estimates**
We have the following critical
accounting estimates:
|
| We review and evaluate the net carrying value
of our long-lived assets for impairment upon the occurrence of events or changes in circumstances that indicate that the related carrying
amounts may not be recoverable. A test for recoverability is performed based on the estimated undiscounted future cash flows that will
be generated from operations and the estimated salvage value of assets. There are many assumptions underlying future cash flows that are
subject to significant risks and uncertainties, which include the estimated value of the assets. We review our business and operations
for indications of impairment and, when indications are present, perform an impairment test. We involve a third-party expert when needed.
However, it is possible that changes could occur in the near term that could adversely affect the estimate of future cash flows and salvage
values to be generated from operating assets resulting in an impairment loss; and | |
|
| On an ongoing basis, we evaluate our estimates
and judgments, including those related to fair value of financial instruments. We base our estimates on known trends and events and various
other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. | |
****
|
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
Because we are a smaller reporting
company, this section is not applicable.
|
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |
The financial statements required
by this Item 8 are included in this Annual Report following Item 16 hereof. As a smaller reporting company, we are not required to provide
supplementary financial information.
|
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | |
****
Not applicable.
| | 82 | | |
| | |
|
ITEM 9A. | CONTROLS AND PROCEDURES | |
**Evaluation of Disclosure Controls and Procedures**
As of December 31, 2024, we
have carried out an evaluation, under the supervision of, and with the participation of, our management, including our principal executive
officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the Exchange Act). We have established disclosure
controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated
to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required
disclosure.
Based upon that evaluation,
our principal executive officer and principal financial officer, with the assistance of other members of the Companys management,
have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this annual report and has determined that our
disclosure controls and procedures were not effective due to the material weaknesses as described herein.
**Managements Annual Report on Internal
Control Over Financial Reporting**
Our management is responsible
for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management assessed the
effectiveness of our internal control over financial reporting as of December 31, 2024. In making this assessment, our management used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated 2013 Framework.
Our management has concluded that, as of December 31, 2024, our internal control over financial reporting was not effective.
A material weakness is a control
deficiency (within the meaning of the PCAOB Auditing Standard No. 2) or combination of control deficiencies that result in more than a
remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management
has identified the following material weaknesses:
|
1. | We do not have sufficient resources in our accounting department, which restricts our ability to gather,
analyze and properly review information related to financial reporting, including applying complex accounting principles relating to consolidation
accounting, related party transactions, fair value estimates and analysis of financial instruments for proper classification in the consolidated
financial statements, in a timely manner. | |
|
2. | Due to our size and nature, segregation of all conflicting duties may not always be possible and may not
be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of
transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties
during our assessment of our disclosure controls and procedures and concluded that the control deficiency that resulted represented a
material weakness. | |
|
3. | Our primary user access controls (i.e., provisioning, de-provisioning, privileged access and user access
reviews) to ensure appropriate authorization and segregation of duties that would adequately restrict user and privileged access to the
financially relevant systems and data to appropriate personnel were not designed and/or implemented effectively. We did not design and/or
implement sufficient controls for program change management to certain financially relevant systems affecting our processes. | |
| | 83 | | |
| | |
|
4. | The Company did not design and/or implement user access controls to ensure appropriate segregation of
duties or program change management controls for certain financially relevant systems impacting the Companys processes around revenue
recognition and digital assets to ensure that IT program and data changes affecting the Companys (i) financial IT applications,
(ii) digital currency mining equipment, and (iii) underlying accounting records, are identified, tested, authorized and implemented appropriately
to validate that data produced by its relevant IT system(s) were complete and accurate. Automated process-level controls and manual controls
that are dependent upon the information derived from such financially relevant systems were also determined to be ineffective as a result
of such deficiency. In addition, the Company has not effectively designed a manual key control to detect material misstatements in revenue. | |
*Planned Remediation*
Management continues to work
to improve its controls related to our material weaknesses, specifically relating to user access and change management surrounding our
IT systems and applications. Management will continue to implement measures to remediate material weaknesses, such that these controls
are designed, implemented, and operating effectively. The remediation actions include: (i) enhancing design and documentation related
to both user access and change management processes and control activities; and (ii) developing and communicating additional policies
and procedures to govern the area of IT change management. In order to achieve the timely implementation of the above, management has
commenced the following actions and will continue to assess additional opportunities for remediation on an ongoing basis:
|
| Engaging a third-party specialist to assist management with improving the Companys overall control
environment, focusing on change management and access controls; | |
|
| Implementing new applications and systems that are aligned with managements focus on creating strong
internal controls; and | |
|
| Continuing to increase headcount across the Company, with a particular focus on hiring individuals with
strong Sarbanes Oxley and internal control backgrounds. | |
We are currently working to
improve and simplify our internal processes and implement enhanced controls, as discussed above, to address the material weaknesses in
our internal control over financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures. These material
weaknesses will not be considered to be remediated until the applicable remediated controls are operating for a sufficient period of time
and management has concluded, through testing, that these controls are operating effectively.
Despite the existence of these
material weaknesses, we believe that the consolidated financial statements included in the period covered by this Annual Report on Form
10-K fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented
in conformity with U.S. generally accepted accounting principles.
**Changes in Internal Control over Financial Reporting**
During the most recent fiscal
quarter in 2024, there were no significant changes in our internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
|
ITEM 9B. | OTHER INFORMATION | |
**Trading Plans**
During the three months ended
December 31, 2024, no director or Section 16 officer of the Company adopted or terminated a Rule 10b5-1 trading arrangement
or non-Rule 10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K.
|
ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS | |
Not applicable.
****
| | 84 | | |
| | |
**PART III**
|
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | |
The following table sets forth
the positions and offices presently held by each of our current directors and executive officers and their ages:
|
|
|
|
Served as a | |
|
|
|
Position and Offices |
Director and | |
|
Name |
Age |
Held with the Company |
Officer Since | |
|
MiltonC.
Ault, III (1) |
55 |
Executive Chairman of the Board |
2017 | |
|
William
B. Horne (1) |
56 |
Chief Executive Officer, Vice Chairman and Director |
2016 | |
|
Henry
Nisser (1) |
56 |
President, General Counsel and Director |
2019 | |
|
Kenneth
S. Cragun (1) |
64 |
Chief Financial Officer |
2020 | |
|
Robert O. Smith |
80 |
Lead Independent Director |
2016 | |
|
Moti Rosenberg |
77 |
Director |
2015 | |
|
Jeffrey A. Bentz |
65 |
Director |
2018 | |
|
(1) | Executive Officer. | |
Each of the directors named
above will serve until the next annual meeting of our stockholders or until his respective successor is elected and qualified. Subject
to the terms of applicable employment agreements, our executive officers serve at the discretion of our Board.
**Milton C. (Todd) Ault,
III** has served as our Executive Chairman since January 2021. Between December 2017 and January
2021, Mr. Ault was our Chief Executive Officer and between March 2017 and December 2017, Mr. Ault served as our Executive Chairman. Mr.
Ault has served as a director of Alzamend since January 2024. Mr. Ault is Alzamends founder
and served as Chairman of the Board and a director from inception in 2016 until its initial public offering in June 2021. Mr. Ault served
as the Chairman of the Board of Ault Disruptive since its incorporation in February 2021 until October 2024. Since January 2024, Mr. Ault
has served as the Chairman and Chief Executive Officer of ROI. Between April 2023 and September 2024, Mr. Ault served as the Executive
Chairman of the board of directors of Algorhythm Holdings, Inc., an issuer listed on Nasdaq (RIME). Mr. Ault has served
as Chairman and Chief Executive Officer of Ault & Company since December 2015, and as Chairman of AVLP since September 2014. Since
January 2011, Mr. Ault has been the Vice President of Business Development for MCKEA Holdings, LLC, a family office. Mr. Ault is a seasoned
business professional and entrepreneur who has spent more than twenty-seven years identifying value in various financial markets including
equities, fixed income, commodities, and real estate. Throughout his career, Mr. Ault has consulted for a few publicly traded and privately
held companies, providing each of them the benefit of his diversified experience, that range from development stage to seasoned businesses.
**William
B. Horne** has been a member of our board of directors since October 2016. In January 2018, Mr. Horne was appointed as our Chief Financial
Officer until August 2020, when he resigned as our Chief Financial Officer and was appointed as our President. On January 12, 2021, Mr.
Horne resigned as our President and became our Chief Executive Officer. Mr. Horne has served as a director of Alzamend since June 2016
and upon the effectiveness of its initial public offering in June 2021, Mr. Horne become its Chairman of the Board. Mr. Horne served as
Alzamends Chief Financial Officer from June 2016 through December 2018. Mr. Horne served as a director and Chief Executive Officer
of Ault Disruptive since its inception in February 2021 until October 2024. Mr. Horne has served as a director and Chief Financial Officer
of AVLP since June 2016. Mr. Horne has served as a director and Chief Financial Officer of Ault & Company since October 2017. He served
as the Chief Financial Officer of Targeted Medical Pharma, Inc. from August 2013 to May 2019. Mr. Horne previously held the position of
Chief Financial Officer in various public and private companies in the healthcare and high-tech field.Mr. Horne has a Bachelor of
Arts Magna Cum Laude in Accounting from Seattle University.
**Henry C.W. Nisser**,
has been our President since May2019, and has served as our Executive Vice President and General Counsel and as one of our directors
since September2020. Mr. Nisser has served as Alzamends Executive Vice President and General Counsel on a part-time basis
since May2019. Mr.Nisser was appointed as a director of Alzamend in September2020. Since March 2023, Mr. Nisser has
served as the President, General Counsel and director of ROI. Between February 2021 and October 2024, Mr. Nisser served as the President,
General Counsel and a director of Ault Disruptive. Between April 2023 and August 2024, Mr. Nisser served as a director of RIME. Mr.Nisser
is the Executive Vice President and General Counsel of AVLP. From December 15, 2021 through March 16, 2022, Mr. Nisser served as Chief
Executive Officer and on the board of directors of TurnOnGreen. From October2011 through April2019, Mr.Nisser was an
associate and subsequently a partner with Sichenzia Ross Ference LLP, a law firm in New York. While with this law firm, his practice was
concentrated on national and international corporate law, with a particular focus on U.S. securities compliance, public as well as private
M&A, equity and debt financings and corporate governance. Mr.Nisser received his B.A. degree from Connecticut College, where
he majored in International Relations and Economics. He received his LL.B. from University of Buckingham School of Law in the United Kingdom.
| | 85 | | |
| | |
**Kenneth S. Cragun** has
been our Chief Financial Officer since August 2020 and between October 2018 and August 2020, served
as our Chief Accounting Officer. Since June 2021, Mr. Cragun has served as Senior Vice President of Finance at Alzamend on a part-time
basis. Between December 2018 and June 2021, Mr. Cragun served as the Chief Financial Officer of Alzamend. Between February 2021 and October
2024, Mr. Cragun served as the Chief Financial Officer of Ault Disruptive. Since September 2018, Mr. Cragun has served on the board of
directors and Chairman of the Audit Committee of Verb Technology Company, Inc. Between July 2022 and September 2024, Mr. Cragun served
on the board of directors of RIME. He served as a CFO Partner at Hardesty, LLC, a national executive services firm between October2016
and October 2018. His assignments at Hardesty included serving as Chief Financial Officer of CorVel Corporation, a publicly traded company
and a nationwide leader in technology driven, healthcare-related, risk management programs, and of RISA Tech, Inc., a private structural
design and optimization software company. Mr.Cragun was also Chief Financial Officer of two Nasdaq-traded companies, Local Corporation,
from April2009 to September2016, and Modtech Holdings, Inc., from June2006 to March2009, a supplier of modular
buildings. Prior thereto, he had financial leadership roles with increasing responsibilities at MIVA, Inc., ImproveNet, Inc., NetCharge
Inc., C-Cube Microsystems, Inc, and 3-Com Corporation. Mr.Cragun began his professional career at Deloitte. Mr.Cragun holds
a Bachelor of Science degree in accounting from Colorado State University-Pueblo.
**Robert O. Smith**has
served as a director since September 2016, and was previously a member of our board from November 2010 to May 2015. Mr. Smith is currently
an independent C-level executive consultant working with Bay Area high-tech firms on various strategic initiatives in all aspects of their
business. Mr. Smith has served on the board of directors of GWW since September 2022. Mr. Smith has served on the board of directors of
ROI since October of 2023, where he acts as ROIs lead independent director as well as the chairman of its audit committee. Mr.
Smith served on the board of directors of Ault Disruptive since its inception in February 2021 until October 2024. From 2004 to 2007,
he served on the board of directors of Castelle Corporation. From 1990 to 2002, he was our President, Chief Executive Officer and Chairman
of the Board. From 1980 to 1990, he held several management positions with Computer Products, Inc., the most recent being President of
its Compower/Boschert division. From 1970 to 1980, he held managerial accounting positions with Ametek/Lamb Electric and with the JM Smucker
Company. Mr. Smith received his BBA degree in Accounting from Ohio University.
**Mordechai Rosenberg**has
served as a director since June 2015. Mr. Rosenberg serves as one of our independent directors. He has served as an independent consultant
to various companies in the design and implementation of homeland security systems in Europe and Africa since 2010. From 2004 to 2009,
he served as a special consultant to Bullet Plate Ltd., a manufacturer of armor protection systems, and NovIdea Ltd., a manufacturer of
perimeter and border security systems. From 2000 to 2003, Mr. Rosenberg was the general manager of ZIV U.P.V.C Products Ltd.s doors
and window factory. Mr. Rosenberg is an active reserve officer and a retired colonel from the Israeli Defense Force (IDF),
where he served for 26 years and was involved in the development of weapon systems. In the IDF, Mr. Rosenberg served in various capacities,
including, company, battalion and brigade commander, head of the training center for all IDF infantry, and head of the Air Forces
Special Forces. Mr. Rosenberg received a B.A in History from the University of Tel Aviv and a Master of Arts in Political Science from
the University of Haifa in Israel. Mr. Rosenberg graduated from the course of Directors & Officers at the College of Management, Tel
Aviv.
**Jeffrey A. Bentz** has
served as a director since January 2018. Mr. Bentz is an experienced businessman who served from 1994 to 2022 as President of North Star
Terminal & Stevedore Company, a full-service stevedoring company located in Alaska and whose major areas of business include terminal
operations and management, stevedore services and heavy equipment operations. Mr. Bentz has served as a director of Ault Disruptive since
its inception in February 2021 and GWW since September 2022. He also has served as a director and advisor to several private companies
and agencies. Mr. Bentz obtained a B.A. degree in Business and Finance from Western Washington University.
**Corporate Governance**
Our Board is currently composed
of six members and maintains the following three standing committees: (1) the Audit Committee; (2) the Compensation Committee; and (3)
the Nominating and Governance Committee. The membership and the function of each of the committees are described below. Our Board may,
from time to time, establish a new committee or dissolve an existing committee depending on the circumstances. Current copies of the charters
for the Audit Committee, the Compensation Committee and the Nominating and Governance Committee can be found on our website athttps://hyperscaledata.com/.
| | 86 | | |
| | |
**Audit Committee**
Messrs. Smith, Rosenberg and
Bentz currently comprise the Audit Committee of our Board. Our Board has determined that each of the current members of the Audit Committee
satisfies the requirements for independence and financial literacy under the standards of the SEC and the NYSE American. Our Board has
also determined that Mr. Smith qualifies as an audit committee financial expert as defined in SEC regulations and satisfy
the financial sophistication requirements set forth in the NYSE American Rules. Mr. Smith serves as the Chairman of the Audit Committee.
The Audit Committee is responsible
for, among other things, selecting and hiring our independent auditors, approving the audit and pre-approving any non-audit services to
be performed by our independent auditors; reviewing the scope of the annual audit undertaken by our independent auditors and the progress
and results of their work; reviewing our financial statements, internal accounting and auditing procedures, and corporate programs to
ensure compliance with applicable laws; and reviewing the services performed by our independent auditors to determine if the services
rendered are compatible with maintaining the independent auditors impartial opinion.
**Compensation Committee**
Messrs. Smith, Rosenberg and
Bentz currently comprise the Compensation Committee of our Board. Our Board has determined that each of the current members of the Compensation
Committee meets the requirements for independence under the standards of the NYSE American. Mr. Bentz serves as Chairman of the Compensation
Committee.
The Compensation Committee
is responsible for, among other things, reviewing and approving executive compensation policies and practices; reviewing and approving
salaries, bonuses and other benefits paid to our officers, including our Executive Chairman, Chief Executive Officer, President and Chief
Financial Officer; and administering our stock option plans and other benefit plans.
**Nominating and Governance Committee**
Messrs. Smith, Rosenberg and
Bentz currently comprise the Nominating and Governance Committee of our Board. Our Board has determined that each of the current members
of the Nominating and Governance Committee meets the requirements for independence under the standards of the NYSE American. Mr. Rosenberg
serves as Chairman of the Nominating and Governance Committee.
The Nominating and Governance
Committee is responsible for, among other things, assisting our Board in identifying prospective director nominees and recommending nominees
for each annual meeting of stockholders to the Board; developing and recommending governance principles applicable to our Board; overseeing
the evaluation of our Board and management; and recommending potential members for each Board committee to our Board.
The Nominating and Governance
Committee considers diversity when identifying Board candidates. In particular, it considers such criteria as a candidates broad-based
business and professional skills, experiences and global business and social perspective.
In addition, the Committee
seeks directors who exhibit personal integrity and a concern for the long-term interests of stockholders, as well as those who have time
available to devote to Board activities and to enhancing their knowledge of the power-supply industry. Accordingly, we seek to attract
and retain highly qualified directors who have sufficient time to attend to their substantial duties and responsibilities.
**Executive Committee**
As a holding company, our
business strategy is designed to increase stockholder value. Under this strategy, we are focused on managing and financially supporting
our existing subsidiaries and partner companies, with the goal of pursuing monetization opportunities and maximizing the value returned
to stockholders. We have, are and will consider initiatives including, among others: public offerings, the sale of individual partner
companies, the sale of certain or all partner company interests in secondary market transactions, or a combination thereof, as well as
other opportunities to maximize stockholder value, such as activist trading. We anticipate returning value to stockholders after satisfying
our debt obligations and working capital needs.
| | 87 | | |
| | |
On October 7, 2019, we created
an Executive Committee which is comprised of our Executive Chairman, Chief Executive Officer and President. The Executive Committee meets
on a daily basis to address the Companys critical needs and provides a forum to approve transactions which are communicated to
our Chief Financial Officer and Senior Vice President of Finance on a bi-weekly basis by our Chief Executive Officer.
Our Executive Committee approves
and manages our investment and trading strategy. The Executive Committee has decades of experience in financial, investing and securities
transactions. Led by our Founder and Executive Chairman, Milton C. (Todd) Ault, III, we seek to find undervalued companies and disruptive
technologies with a global impact. We use a traditional methodology for valuing securities that primarily looks for deeply depressed prices.
Upon making an investment, we often become actively involved in the companies we seek to acquire. That activity may involve a broad range
of approaches, from influencing the management of a target to take steps to improve stockholder value, to acquiring a controlling or sizable
but non-controlling interest or outright ownership of the target company in order to implement changes that we believe are required to
improve its business, and then operating and expanding that business. Mr. Ault relies heavily on William B. Horne, our Vice Chairman and
Chief Executive Officer, and Henry Nisser, our President and General Counsel, to provide analysis and guidance on various objectives that
the Company sets, including financings and all acquisition targets and throughout the acquisition process.
From time to time, we engage
in discussions with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of
a process we initiate. To the extent we believe that a subsidiary partner companys further growth and development can best be supported
by a different ownership structure or if we otherwise believe it is in our stockholders best interests, we will seek to sell some
or all of our position in the subsidiary or partner company. These sales may take the form of privately negotiated sales of stock or assets,
mergers and acquisitions, public offerings of the subsidiary or partner companys securities, dividends and, in the case of publicly
traded partner companies, transactions in their securities in the open market. Our plans may include taking subsidiaries or partner companies
public through rights offerings, mergers or spin-offs and directed share subscription programs. We will continue to consider these and
functionally equivalent programs and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize
value for our stockholders.
Our Executive Committee acts
as the underwriting committee for Ault Lending and approves all lending transactions. Under its business model, Ault Lending generates
revenue through origination fees charged to borrowers and interest generated from each loan. Ault Lending may also generate income from
appreciation of investments in marketable securities as well as any shares of common stock underlying convertible notes or warrants issued
to Ault Lending in any particular financing. Ault Lendings activities are more fully described elsewhere in this Annual Report;
see page 19.
**Involvement in Certain Legal Proceedings**
Except as set forth below,
to the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director,
executive officer, or employee:
|
| been convicted in a criminal proceeding or been
subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
|
| had any bankruptcy petition filed by or against
the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or
executive officer, either at the time of the bankruptcy filing or within two years prior to that time; *+ | |
|
| been subject to any order, judgment, or decree,
not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or
temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities,
investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; | |
|
| been found by a court of competent jurisdiction
in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended, or vacated; ** | |
| | 88 | | |
| | |
|
| been the subject of, or a party to, any federal
or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including
any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or
commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited
to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist
order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business
entity; | |
|
| or been the subject of, or a party to, any sanction
or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the
Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association,
entity or organization that has disciplinary authority over its members or persons associated with a member. | |
* Mr. Cragun served as Chief Financial Officer
of Local Corporation (April 2009 to September 2016), formerly based in Irvine, California, and, in June 2015, Local Corporation filed
a voluntary petition in the United States Bankruptcy Court for the Central District of California seeking relief under the provisions
of Chapter 11 of Title 11 of the United States Code.
** Please see the press release issued by the
Company on August 15, 2023.
+ Mr. Horne has served as Chief Financial Officer
of AVLP since June 2016, and, in March 2025, AVLP filed a voluntary petition in the United States Bankruptcy Court for the District of
Nevada seeking relief under the provisions of Chapter 7 of Title 11 of the United States Code.
Except as set forth in our
discussion below in Certain Relationships and Related Transactions, none of our directors or executive officers has been
involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed
pursuant to the rules and regulations of the SEC.
**Family Relationships**
There are no family relationships among our directors
and executive officers.
**Code of Ethics**
We have adopted the Code of
Ethical Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer, controller
or person performing similar functions. The Code of Ethical Conduct is designed to deter wrongdoing and to promote honest and ethical
conduct and compliance with applicable laws and regulations. The full text of our Code of Ethical Conduct is published on our website
athttps://hyperscaledata.com/. We will disclose any substantive amendments to the Code of Ethical Conduct or any waivers, explicit
or implicit, from a provision of the Code on our website or in a current report on Form 8-K. Upon request to our President, Henry Nisser,
we will provide without charge, a copy of our Code of Ethical Conduct.
| | 89 | | |
| | |
|
ITEM 11. | EXECUTIVE COMPENSATION | |
**Summary Compensation Table**
The following Summary Compensation
Table sets forth all compensation earned in all capacities during the years ended December 31, 2024 and 2023, by our principal executive
officer. Because we are a Smaller Reporting Company, we only have to report information of our principal executive officer and our two
other most highly compensated executive officers.
|
SUMMARY COMPENSATION TABLE | |
|
Name
and principal position |
Year |
Salary
($) |
Bonus
($) |
Stock
Awards ($) (1) |
Option
Awards ($)
(1) |
All
Other Compensation ($)(2) |
Total
($) | |
|
Milton C. Ault, III |
2024 |
400,000 |
16,667 |
- |
- |
126,950 |
543,617 |
|
|
Executive Chairman of the Board |
2023 |
400,000 |
16,667 |
- |
- |
325,773 |
742,440 |
|
|
William B. Horne |
2024 |
400,000 |
16,667 |
- |
- |
84,502 |
501,169 |
|
|
Chief Executive Officer |
2023 |
375,000 |
16,667 |
- |
- |
98,195 |
489,862 |
|
|
Henry C. Nisser |
2024 |
300,000 |
12,500 |
- |
- |
24,921 |
337,421 |
|
|
President and General Counsel |
2023 |
300,000 |
12,500 |
- |
- |
55,727 |
368,227 |
|
|
(1) |
The values reported in the Stock Awards and Option
Awards columns represent the aggregate grant date fair value, computed in accordance with Accounting Standards Codification (ASC)
718 Share Based Payments,of grants of stock options and stock awards to our named executive officer in the years shown. | |
|
(2) |
The amounts in All Other Compensation consist of 401(k)
matching amounts, vehicle allowance, personal use of the Companys corporate aircraft, health insurance benefits, long-term and
short-term disability insurance benefits, and travel and entertainment expenses. The personal use of corporate aircraft, reflects the
incremental cost to Hyperscale Data for use of the corporate aircraft, determined on the basis of the variable operational costs of each
flight, including fuel, maintenance, flight crew travel expense. Summary table of All Other Compensation for the year ended
December 31, 2024 is set forth below: | |
|
Name | |
401(k) Matching Contribution ($) | | |
Automobile Expenses ($) | | |
Personal Use of Aircraft ($) | | |
Medical and Life Insurance Benefits ($) | | |
Total All Other Compensation ($) | | |
|
Milton C. Ault, III | |
| 9,442 | | |
| 12,000 | | |
| 78,324 | | |
| 27,184 | | |
| 126,950 | | |
|
William B. Horne | |
| 17,250 | | |
| 12,000 | | |
| - | | |
| 55,252 | | |
| 84,502 | | |
|
Henry C. Nisser | |
| 12,500 | | |
| - | | |
| - | | |
| 12,421 | | |
| 24,921 | | |
**Compensation from Related Companies**
The compensation table above
does not include compensation paid to those executives from related companies for the year ended December 31, 2024 as set forth below:
|
| |
AVLP | | |
Alzamend | | |
Circle 8 | | |
|
Name | |
Officer Compensation | | |
Board Fees | | |
Officer Compensation | | |
Board Fees | | |
|
Milton C. Ault, III | |
$ | - | | |
$ | 37,500 | | |
$ | - | | |
$ | - | | |
|
William B. Horne | |
$ | 33,333 | | |
$ | 50,000 | | |
$ | - | | |
$ | 25,000 | | |
|
Henry C. Nisser | |
$ | 33,333 | | |
$ | - | | |
$ | 50,000 | | |
$ | - | | |
**Employment Agreements**
**Milton C. Ault, III**
On June 17, 2018, the
Company entered into a ten-year executive employment agreement with Milton C. Ault, III, to serve as Chief Executive Officer of the Company.
On January 19, 2021, Mr. Ault was appointed as Executive Chairman of the Company. For his services, Mr. Ault will be paid a base salary
of $400,000 per annum (the Base Salary).
| | 90 | | |
| | |
Pursuant
to the terms and subject to the conditions set forth in the agreement, if the Company meets or exceeds criteria adopted by the Companys
compensation committee (the Compensation Committee) for earning bonuses which shall be adopted by the Compensation Committee
annually, Mr. Ault shall be eligible to receive an annual bonus, which percentage shall be based on achievement of applicable performance
goals determined by the Compensation Committee.
In
addition, Mr. Ault shall be eligible to receive a performance-based award (the CEO Performance Award), provided that the
Company, for any given fiscal year during the term of this agreement, meets the following criteria: (A) an increase in revenue, as calculated
under GAAP over the previous fiscal year as reported in the Annual Report on Form 10-K or successor form for such fiscal year; provided
that any increase less than thirty-five percent (35%) (the Revenue Percentage) shall reduce the CEO Performance Award correspondingly;
(B) positive net income, as calculated under GAAP, as reported in the Annual Report on Form 10-K or successor form for such fiscal year,
provided that any increase less than five percent (5%) (the Net Income Percentage) shall reduce the CEO Performance Award
correspondingly; and (C) positive net cash flow from operations on a year-to-year basis, where cash flow is defined as the net amount
of cash and cash-equivalents being transferred into and out of the Company. The CEO Performance Award shall consist of a number of shares
of the Companys common stock having a maximum value equal to ten percent (10%) of any appreciation in the Companys Market
Capitalization above the High Water Mark (as such terms are defined in the agreement) as measured by the daily average closing bid price
of the Companys common stock for the applicable fiscal year subject to proration obtained by the product of Revenue Percentage
and the Net Income Percentage. If the CEO Performance Award in a fiscal year is less than ten percent (10%) due to a reduction caused
by an annual shortfall in either the Revenue Percentage or the Net Income Percentage, the prior years targets would be deemed to
have been achieved if a corresponding overage in a subsequent fiscal year results in the achievement of the cumulative targets.
The annual and cumulative targets for revenue and net income, which are provided solely for the purpose of establishing cumulative totals,
are set forth in the agreement.
Upon
termination of Mr. Aults employment (other than upon the expiration of the employment), Mr. Ault shall be entitled to receive:
(A) any earned but unpaid base salary through the termination date; (B) all reasonable expenses paid or incurred; and (C) any accrued
but unused vacation time.
Further,
unless Mr. Aults employment is terminated as a result of his death or disability or for cause or he terminates his employment without
good reason, then upon the termination or non-renewal of Mr. Aults employment, the Company shall pay to Mr. Ault a Separation
Payment as follows:(A)an amount equal to four (4) weeks of base salary for each full year of service and
credit for his service commencing from September 22, 2016, (B) should Mr. Ault provide the Company with a separation, waiver and release
agreement within 60 days of termination, then the Company shall: (i) pay his base salary until the last to occur (the Separation
Period) of (1) the expiration of the remaining portion of the initial term or the then applicable renewal term, as the case may
be, but in no event an amount greater than the Base Salary payable should either such period expire within two years, or (2) the 12-month
period commencing on the date Mr. Ault is terminated, payable in one lump sum; (ii) provide during the Separation Period the same medical,
dental, long-term disability and life insurance; and (iii) pay an amount equal to the product obtained by multiplying (x) the maximum
annual bonus as Mr. Ault would have been otherwise entitled to receive by (y) the fraction in which the numerator is the number of calendar
months worked including the entire month in which severance occurred and the denominator of which is 12; and (iv) all outstanding options
and other equity awards shall immediately vest and become fully exercisable for a period of 24 months. Finally, upon the occurrence
of a change in control, Mr. Ault will be paid an amount equal to the greater of: (i) five times his then current Base Salary or (ii) the
Separation Payment amount set forth above, without regard to whether Mr. Ault continues in the employ of the Company or its successor.
****
**William B. Horne**
On January 25, 2018, we entered
into an employment agreement with William Horne to serve as Chief Financial Officer and Executive Vice President of the Company and its
subsidiaries for an initial term through September 30, 2022, which automatically renews thereafter for successive one-year terms unless
either party provides written notification at least four months prior to the end of a term of their desire to terminate. Mr. Hornes
base salary was $300,000 per annum, which was increased to $400,000 effective April 1, 2023. Mr. Horne is eligible to receive an annual
cash bonus equal to a percentage of his annual base salary based on achievement of applicable performance goals determined by the Companys
compensation committee.
Upon
termination of Mr. Hornes employment (other than upon the expiration of the employment), Mr. Horne shall be entitled to receive:
(i) any earned but unpaid base salary through the termination date; (ii) all reasonable expenses paid or incurred; and (iii) any accrued
but unused vacation time.
| | 91 | | |
| | |
Further,
unless Mr. Hornes employment is terminated as a result of his death or disability or for cause or he terminates his employment
without good reason, then upon the termination or non-renewal of Mr. Hornes employment, the Company shall pay to Mr. Horne a Separation
Payment as follows:(A)an amount equal to four weeks of base salary for each full year of service, (B) should
Mr. Horne provide the Company with a separation, waiver and release agreement within 60 days of termination, then the Company shall:
(i) pay his base salary until the last to occur (the Separation Period) of (1) the expiration of the remaining portion of
the initial term or the then applicable renewal term, as the case may be, or (2) the 12-month period commencing on the date Mr. Horne
is terminated, payable in one lump sum; (ii) provide during the Separation Period the same medical, dental, long-term disability and life
insurance; and (iii) pay an amount equal to the product obtained by multiplying (x) the maximum annual bonus as Mr. Horne would have been
otherwise entitled to receive by (y) the fraction in which the numerator is the number of calendar months worked including the entire
month in which severance occurred and the denominator of which is 12; and (iv) all outstanding options and other equity awards shall immediately
vest and become fully exercisable for a period of 24 months. Finally, upon the occurrence of a change in control, Mr. Horne will
be paid an amount equal to four times his Separation Payment.
**Henry Nisser**
On April 12, 2019, the Company
entered into an employment agreement (the Agreement) with Henry Nisser to serve as General Counsel and Executive Vice President
of the Company and its subsidiaries for an initial term through May 1, 20223 which automatically renews thereafter for successive one-year
terms unless either party provides written notification at least four months prior to the end of a term of their desire to terminate.
The effective date of the Agreement was May 1, 2019. For 2023, Mr. Nissers base salary was $300,000 per annum (the Base
Salary).
Mr. Nisser is eligible to
receive an annual cash bonus equal to a percentage of his annual base salary based on achievement of applicable performance goals determined
by the Companys compensation committee.
Mr. Nissers bonuses,
if any, and all stock based compensation shall be subject to Company Clawback Rights if during the period that Mr. Nisser
is employed by the Company and upon the termination of Mr. Nissers employment and for a period of two years thereafter, there is
a restatement of any of the Companys financial results from which any bonuses and stock based compensation to Mr. Nisser shall
have been determined.
Upon termination of Mr. Nissers
employment (other than upon the expiration of the employment), Mr. Nisser shall be entitled to receive: (A) any earned but unpaid base
salary through the termination date; (B) all reasonable expenses paid or incurred; and (C) any accrued but unused vacation time.
Further,
unless Mr. Nissers employment is terminated as a result of his death or disability or for cause or he terminates his employment
without good reason, then upon the termination or non-renewal of Mr. Nissers employment, the Company shall pay to Mr. Nisser a
Separation Payment as follows: (a) an amount equal to four weeks of base salary for each full year of service, (b) commencing
on the date that shall be one (1) year from the effective date, should Mr. Nisser provide the Company with a separation, waiver and release
agreement within 30 days of termination, then the Company shall pay to Mr. Nisser the Base Salary (in effect immediately prior to the
termination date) an amount equal to the lesser of what Mr. Nisser would have received if the employment period ended after (1) the expiration
of the remaining portion of the initial term or the then applicable renewal term, as the case may be, or (2) the 18-month period commencing
on the date Executive is terminated, payable in one lump sum; (ii) provide during the separation period the same medical, dental, long-term
disability and life insurance; and (iii) pay an amount equal to the product obtained by multiplying (x) the maximum annual bonus as Mr.
Nisser would have been otherwise entitled to receive by (y) the fraction in which the numerator is the number of calendar months worked
including the entire month in which severance occurred and the denominator of which is 12; and (iv) all outstanding options and other
equity awards shall immediately vest and become fully exercisable for a period of 24 months. Finally, upon the occurrence of a change
in control, Mr. Nisser will be paid an amount equal to four times his Separation Payment.
**CEO Pay Ratio**
As required by Section 953(b)
of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are providing disclosure regarding the ratio of annual total compensation
of Mr. Ault, our Executive Chairman, to that of our median employee. Our median employee earned $50,000 in total compensation for 2024.
Based upon the total 2024 compensation reported for Mr. Ault of $543,617 as reported under Total in the Summary Compensation
Table, our ratio of PEO to median employee pay was 11:1. Our median employee is employed in our ROI subsidiary.
| | 92 | | |
| | |
Our Chief Executive Officer
and Principal Executive Officer, however, is not Mr. Ault but William B. Horne. In order to follow the intent of the SECs rules,
which appear to presume that the CEO is the highest paid executive officer of an issuer, we chose to present the total annual compensation
of Mr. Ault, who is paid marginally more than Mr. Horne.
While Mr. Aults salary
is the same as Mr. Hornes for the fiscal year ended December 31, 2024 and exceeds Mr. Hornes salary by $25,000 for the fiscal
year ended December 31, 2023, respectively, his annual total compensation exceeds Mr. Hornes by no more than $42,448 and $252,578
for the fiscal years ended December 31, 2024 and 2023, respectively.
Calculation Methodology
To identify our median employee,
we identified our total employee population worldwide as of December 31, 2024, excluding our Executive Chairman, in accordance with SEC
rules. On December 31, 2024, 95% of our employee population was located in the U.S., with 5% in non-U.S. locations.
We collected full-year 2024
actual gross earnings data for the December 31, 2024 employee population, including cash-based compensation and equity-based compensation
that was realized in 2024, relying on our internal payroll records. Compensation was annualized on a straight-line basis for non-temporary
new hire employees who did not work with our company for the full calendar year.
Once we determined the median
employee, we calculated total compensation for the median employee in the same manner in which we determine the compensation shown for
our named executive officers in the Summary Compensation Table, in accordance with SEC rules.
**Pay Versus Performance**
Pay Versus Performance Table
The following table sets forth
information concerning: (1) the compensation of our Executive Chairman, Mr. Ault (referred to in the table below as EC)
and the average compensation for our other Named Executive Officers (NEOs), Mr. Horne (our PEO) and Mr. Nisser, both as
reported in the Summary Compensation Table and with certain adjustments to reflect the compensation actually paid to such
individuals, as defined under SEC rules, for each of the fiscal years ended December 31, 2022, 2023 and 2024 and (2) our cumulative total
shareholder return (TSR), the cumulative TSR of our selected peer group (Bitfarms Limited, Cipher Mining, Inc., CleanSpark,
Inc., Hive Digital Technologies Limited, Riot Platforms, Inc., Titan Machinery Inc., Alta Equipment Group Inc., B. Riley Financial, Inc.),
net loss and revenue over such years, in each case determined in accordance with SEC rules:
|
Value of Initial Fixed $100 Investment Based on: | |
|
Year | |
Summary Compensation Table Total for PEO ($) | | |
Compensation Actually Paid to PEO ($) | | |
Average Summary Compensation Table Total for Non-PEO NEOs ($) | | |
Average Compensation Actually Paid to Non-PEO NEOs ($) | | |
Total Shareholder Return ($) | | |
Peer Group Total Shareholder Return ($) | | |
Net Income ($) | | |
Total Revenue ($) | | |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
2024 | |
| 543,617 | | |
| 543,617 | | |
| 419,295 | | |
| 419,295 | | |
| 0.00 | | |
| 48.64 | | |
| (61,481,000 | ) | |
| 106,662,000 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
2023 | |
| 742,440 | | |
| 689,052 | | |
| 429,045 | | |
| 375,657 | | |
| 0.03 | | |
| 70.86 | | |
| (232,402,000 | ) | |
| 134,846,000 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
2022 | |
| 2,173,059 | | |
| 1,120,398 | | |
| 1,705,208 | | |
| 652,547 | | |
| 10.08 | | |
| 40.15 | | |
| (182,209,000 | ) | |
| 104,079,000 | | |
Compensation actually paid
to our EC represents the Total compensation reported in the Summary Compensation Table for the applicable fiscal year, adjusted
as follows:
|
| |
2024 | | |
2023 | | |
2022 | | |
|
Name | |
EC ($) | | |
Average of NEOs($) | | |
EC ($) | | |
Average of NEOs($) | | |
EC ($) | | |
Average of NEOs($) | | |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
|
Summary compensation table total | |
| 543,617 | | |
| 419,295 | | |
| 742,440 | | |
| 429,045 | | |
| 2,173,059 | | |
| 1,705,208 | | |
|
Deduction for amounts reported under the stock awards column in the summary compensation table | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
|
Year end value of equity awards granted during year that remain unvested as of year-end | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
|
Year over year change in fair value of outstanding and unvested equity awards | |
| - | | |
| - | | |
| - | | |
| - | | |
| (525,468 | ) | |
| (525,468 | ) | |
|
Year over year change in fair value of equity awards granted in prior years and vested in the year | |
| - | | |
| - | | |
| (53,388 | ) | |
| (53,388 | ) | |
| (527,193 | ) | |
| (527,193 | ) | |
|
Compensation actually paid | |
| 543,617 | | |
| 419,295 | | |
| 689,052 | | |
| 375,657 | | |
| 1,120,398 | | |
| 652,547 | | |
| | 93 | | |
| | |
Narrative Disclosure to Pay Versus Performance
Table
*Relationship between Financial Performance
Measures*
The line graphs below compare
(i) the compensation actually paid to our EC and the average of the compensation actually paid to our remaining NEOs, with (ii) our cumulative
TSR, (iii) our peer group TSR, (iv) our net loss, and (v) our revenue, in each case, for the fiscal years ended December 31, 2022, 2023
and 2024.
TSR amounts reported in the
graph assume an initial fixed investment of $100, and that all dividends, if any, were reinvested. The term PEO as used
in the tables below refers to the EC, not the PEO.
*
| | 94 | | |
| | |
**Policies on Ownership, Insider Trading, 10b5-1
Plans and Hedging**
We do not have formal stock
ownership guidelines for our employees or directors, because the Board is satisfied that stock and option holdings among our employees
or directors are sufficient at this time to provide motivation and to align this groups interests with those of our stockholders.
We have established an insider
trading policy that provides guidelines to, and imposes restrictions on, officers, directors and employees with respect to transactions
in the Companys securities. The Companys insider trading policy prohibits certain actions by such individuals relating to
buying and selling common stock of the Company, and discourages certain other actions in other situations. Such individuals are authorized
to enter into trading plans established according to Section 10b5-1 of the Exchange Act with an independent broker-dealer. Under these
plans, the individual must not exercise any influence over the amount of the securities to be traded, the price at which they are to be
traded or the date of the trade. The plan must either specify the amount, pricing and timing of transactions in advance or delegate discretion
on these matters to an independent third party. Such plans provide a defense from insider trading liability.
We have not adopted any hedging
policies.
**Policies and Practices Related to the Grant
of Certain Equity Awards Close in Time to the Release of Material Nonpublic Information**
We do not have any formal
policy that requires us to grant, or avoid granting, equity-based compensation to our executive officers at certain times. The timing
of any equity grants to executive officers in connection with new hires, promotions, or other non-routine grants is tied to the event
giving rise to the award (such as an executive officers commencement of employment or promotion effective date). As a result, in
all cases, the timing of grants of equity awards, including stock options, occurs independent of the release of any material nonpublic
information, and we do not time the disclosure of material nonpublic information for the purpose of affecting the value of equity-based
compensation.
During fiscal 2024, there
were no equity grants made to our executive officers during any period beginning four business days before the filing of a periodic report
or current report disclosing material non-public information and ending one business day after the filing or furnishing of such report
with the SEC.
| | 95 | | |
| | |
**Advisory Vote on Executive Compensation**
At the annual meeting of stockholders
on November 23, 2022, the stockholders approved, on an advisory basis, the compensation paid to the Companys named executive officers.
An advisory vote on executive compensation is held every three years.
**Director Compensation**
The Company pays each independent
director an annual base amount of $45,000 annually, other than Mr. Smith, who receives a base amount of $55,000 annually due to the additional
services provided by Mr. Smith as a lead independent director and Audit Committee Chairman. Additionally, our Board makes recommendations
for adjustments to an independent directors compensation when the level of services provided is significantly above what was anticipated.
In addition, independent directors are eligible, at the Boards discretion, to receive a bonus.
The table below sets forth,
for each non-employee director, the total amount of compensation related to his service during the year ended December 31, 2024:
|
| |
Feesearned or | | |
Stock | | |
Option | | |
Allother | | |
| | |
|
Name | |
paid in cash($) | | |
awards ($) | | |
awards($) | | |
compensation ($) | | |
Total($) | | |
|
Robert O. Smith | |
| 55,000 | | |
| | | |
| | | |
| | | |
| 55,000 | | |
|
Jeffrey A. Bentz | |
| 45,000 | | |
| | | |
| | | |
| | | |
| 45,000 | | |
|
Mordechai Rosenberg | |
| 45,000 | | |
| | | |
| | | |
| | | |
| 45,000 | | |
**Stock Incentive Plans**
On December 28, 2018, the
stockholders approved the 2018 Stock Incentive Plan (as amended on May 5, 2019), which amendment was approved by the stockholders on July
19, 2019, the 2018 Stock Incentive Plan),under which options to acquire up to 5,000 shares of common stock may be
granted to the Companys directors, officers, employees and consultants. The 2018 Stock Incentive Plan is in addition to the Companys
(ii) 2016 Stock Incentive Plan, under which options to acquire up to 1 share of common stock may be granted to the Companys directors,
officers, employees and consultants, (iv) 2021 Stock Incentive Plan, under which 1,000 stock options, restricted stock, stock appreciation
rights, restricted stock units, and other stock-based compensation. be granted to the Companys directors, officers, employees and
consultants, (v) 2021 Employee Stock Purchase Plan, intended to assist our employees in acquiring share ownership up to an aggregate of
131 shares of common stock, and (vi) 2022 Stock Incentive Plan, under which 10,000 stock options, restricted stock, stock appreciation
rights, restricted stock units, and other stock-based compensation. be granted to the Companys directors, officers, employees and
consultants (collectively the Plans).
The purpose of the Plans is
to advance the interests of the Company by providing to key employees of the Company and its affiliates, who have substantial responsibility
for the direction and management of the Company, as well as certain directors and consultants of the Company, additional incentives to
exert their best efforts on behalf of the Company, to increase their proprietary interest in the success of the Company, to reward outstanding
performance and to provide a means to attract and retain persons of outstanding ability to the service of the Company.
As of December 31, 2024, no
options to purchase shares of Class A common stock were issued and outstanding, and 297 shares are available for future issuance under
the Plans.
**401(k) Plans**
Hyperscale Data and TurnOnGreen
have adopted tax-qualified employee savings and retirement plan, or 401(k) plans, which generally cover all of their full-time employees.
Pursuant to the 401(k) plans, eligible employees may make voluntary contributions to the plan up to a maximum of pursuant to the current
Internal Revenue Code limits. The Hyperscale Data and TurnOnGreen 401(k) plans include matching contributions at the rate of (1) $1.00
for each $1.00 contributed, up to 3% of the base salary and (2) $0.50 for each $1.00 contributed thereafter, up to 5% of the base salary
and permits discretionary contributions. The 401(k) plans are intended to qualify under Sections 401(k) and 401(a) of the Internal Revenue
Code of 1986, as amended. Contributions to such a qualified plan are deductible by the Company when made, and neither the contributions
nor the income earned on those contributions is taxable to plan participants until withdrawn. All 401(k) plan contributions are credited
to separate accounts maintained in trust.
| | 96 | | |
| | |
|
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | |
Except as otherwise indicated
below, the following table sets forth certain information regarding beneficial ownership of our common stock as of April 14, 2025 by
(1) each of our current directors; (2) each of the executive officers; (3) each person known to us to be the beneficial owner of more
than 5% of the outstanding shares of our common stock based upon Schedules 13G or 13D filed with the SEC; and (4) all of our directors
and executive officers as a group. As of April 14, 2025, there were 1,529,995 shares of our common stock issued and outstanding.
Beneficial ownership is determined
in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Common stock subject to
options or warrants that are currently exercisable or exercisable within 60 days of April 14, 2025 are deemed to be outstanding and to
be beneficially owned by the person or group holding such options or warrants for the purpose of computing the percentage ownership of
such person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or
group. Unless otherwise indicated by footnote, to our knowledge, the persons named in the table have sole voting and sole investment power
with respect to all common stock shown as beneficially owned by them, subject to applicable community property laws.
|
| |
Number of |
| | |
| | |
|
| |
shares |
| | |
Approximate | | |
|
| |
beneficially |
| | |
percent | | |
|
Name and address of beneficial owner(1) | |
owned |
| | |
of class | | |
|
Greater than 5% Beneficial Owners: | |
| |
| | |
| | | |
|
Ault & Company, Inc. | |
| 34,832,482 |
| (2) | |
| 95.81 | % | |
|
Directors and Officers: (1) | |
| |
| | |
| | | |
|
MiltonC. Ault, III | |
| 34,833,328 |
| (3) | |
| 95.82 | % | |
|
William Horne | |
| 1 |
| (4) | |
| * | | |
|
Henry Nisser | |
| 3 |
| (5) | |
| * | | |
|
Ken Cragun | |
| 0 |
| | |
| * | | |
|
Robert Smith | |
| 0 |
| | |
| * | | |
|
Mordechai Rosenberg | |
| 0 |
| | |
| * | | |
|
Jeffrey A. Bentz | |
| 0 |
| | |
| * | | |
|
All directors and executive officers as a group (eight persons) | |
| 34,833,332 |
| | |
| 95.82 | % | |
|
* | Less than one percent. | |
|
(1) | Unless otherwise indicated, the business address of each of the individuals is c/o Hyperscale Data, Inc.,
11411 Southern Heights Pkwy, Suite 190, Las Vegas, NV 89141. | |
|
(2) | Represents (i) 8,249 shares of Class A Common Stock owned, (ii) 4,234,561
shares of Class B Common Stock that are convertible into 4,234,561 shares of Class A Common Stock and carries the voting power of 42,345,610
shares of Class A Common Stock, (iii) 29,561,308 shares of Class A Common Stock issuable upon conversion of Series C Convertible Preferred
Stock that carry the voting power of 464,576 shares of Class A Common Stock, (iv) 567,578 shares of Class A Common Stock issuable upon
conversion of Series G Convertible Preferred Stock that carry the voting power of 153,748 shares of Class A Common Stock and (v) 460,786
shares of Class A Common Stock underlying warrants that are either presently exercisable or exercisable within 60 days. | |
|
(3) | Represents (i) 34,832,482 shares of Class A Common Stock beneficially
held by Ault & Company, as discussed in footnote 2 above, (ii) 500 shares of Class A Common Stock, and (iii) 346 shares of Class B
Common Stock that is convertible into 346 share of Class A Common Stock and carries the voting power of 3,460 shares of Class A Common
Stock. Mr. Ault is the Chief Executive Officer of Ault & Company. | |
|
(4) | Represents 1 share of Class B Common Stock that is convertible into
1 share of Class A Common Stock and carries the voting power of 10 shares of Class A Common Stock. | |
|
(5) | Represents (i) 2 shares of Class A Common Stock and (ii) 1 share of
Class B Common Stock that is convertible into 1 share of Class A Common Stock and carries the voting power of 10 shares of Class A Common
Stock. | |
| | 97 | | |
| | |
**Equity Compensation Information**
The following table summarizes information about
our equity compensation plans as of December 31, 2024.
|
| |
| | |
| | |
Numberofsecurities | | |
|
| |
Numberofsecurities | | |
Weighted- | | |
remainingavailablefor | | |
|
| |
tobeissued | | |
average | | |
futureissuanceunder | | |
|
| |
uponexercise | | |
exerciseprice | | |
equitycompensationplans | | |
|
| |
ofoutstanding | | |
ofoutstanding | | |
(excludingsecurities | | |
|
| |
options, warrants and rights | | |
options, warrants and rights | | |
reflectedincolumn(a)) | | |
|
Plan Category | |
(a) | | |
(b) | | |
(c) | | |
|
Equity compensation plans approved by stockholders | |
| 0 | | |
| - | | |
| 297 | | |
|
Equity compensation plans not approved by stockholders | |
| 0 | | |
| - | | |
| - | | |
|
Total | |
| 0 | | |
| - | | |
| 297 | | |
|
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | |
Our Audit Committee or in
certain instances, a special committee of our Board, monitors and reviews issues involving potential conflicts of interest and approves
all transactions with related persons as defined in Item404 of Regulation S-K under the securities laws. Examples of such transactions
that must be approved by our Audit Committee or a special committee of our Board include, but are not limited to any transaction, arrangement,
relationship (including any indebtedness) in which:
|
|
|
|
the aggregate amount involved is determined to by the Audit Committee to be material; | |
|
|
|
|
we are a participant; and | |
|
|
|
|
any of the following has or will have a direct or indirect interest in the transaction: | |
|
|
|
|
an executive officer, director, or nominee for election as a director; | |
|
|
|
|
a greater than five percent beneficial owner of our common stock; or | |
|
|
|
|
any immediate family member of the foregoing. | |
When reviewing transactions
with a related person, the Audit Committee or any special committee of our Board formed for that purpose applies the standards for evaluating
conflicts of interest outlined in our written Code of Business Conduct and Ethics.
The following information
sets forth certain related transactions between us and certain of our stockholders or directors.
**Ault & Company, Inc.**
**Series C Preferred Stock Purchase Agreement**
On November 6, 2023, we entered
into the November 2023 SPA with Ault & Company, pursuant to which we agreed to sell, in one or more closings, to Ault & Company
up to 50,000 shares of Series C Convertible Preferred Stock and the Series C Warrants to purchase up to 0.4 million shares of common stock
for a total purchase price of up to $50 million.
On
March 25, 2024 we entered into an amendment to the (i) November 2023 SPA, (ii) the related
Certificate of Designation of Preferences, Rights and Limitations of the Series C Preferred Convertible Stock and (iii) the number of
Series C Warrants, to provide for (A) an increase in the dollar amount of the Series C Convertible Preferred Stock that Ault & Company
may purchase from us from $50 million to $75 million and (B) extended the date of on which the final closing may occur to June 30, 2024,
subject to Ault & Companys ability to further extended such date for ninety days.
| | 98 | | |
| | |
On
September 17, 2024, we and Ault & Company entered into the Second Amendment. Pursuant to the Second Amendment, the Termination
Date was amended from June 30, 2024 to December 31, 2024, in each case subject to the right of Ault & Company to extend such
date for an additional ninety (90) days.
As
of the date of filing of this Form 10-K, Ault & Company has purchased an aggregate of 50,000 shares of Series C Convertible Preferred
Stock and Series C Warrants to purchase an aggregate of 422,337 Warrant Shares, for an aggregate purchase price of $50.0 million.
Additionally, until the earlier
of (i) four years from the initial closing date of the November 2023 SPA or (ii) the date when Ault & Company holds fewer than 10,000
shares of Series C Convertible Preferred Stock, the Company will be prohibited from (A) entering into any financing, whether debt or equity,
other than conventional loans from a commercial bank, at a price per share less than the Series C Conversion Price (as defined below)
or (B) entering into a variable rate financing transaction.
Further, for as long as Ault
& Company holds at least 10,000 shares of Series C Convertible Preferred Stock, Ault & Company shall have a right to participate
in any subsequent financing (a Subsequent Financing) allowing Ault & Company to purchase such number of securities in
the Subsequent Financing to allow Ault & Company to maintain its percentage beneficial ownership of the Company that Ault & Company
held immediately prior to the Subsequent Financing.
On December 14, 2023, pursuant
to the November 2023 SPA, we sold to Ault & Company, in three separate closings that occurred on the closing date, an aggregate of
41,500 shares of Series C Convertible Preferred Stock and Series C Warrants to purchase 350,543 shares of common stock, for a total purchase
price of $41.5 million. At the Initial Closing, Ault & Company purchased 21,500 shares of Series C Convertible Preferred Stock and
Series C Warrants to purchase 181,607 shares of common stock, for a purchase price of $21.5 million, paid in cash. Immediately upon the
Initial Closing, we paid $20,432,876 to satisfy in full the outstanding secured convertible notes issued to the lenders pursuant to the
Loan and Guarantee Agreement, dated November 7, 2022, as amended on July 19, 2023.
Promptly thereafter, at the
Second Closing, Ault & Company purchased 10,000 shares of Series C Convertible Preferred Stock and Series C Warrants to purchase 84,468
shares of common stock, for a purchase price of $10.0 million, paid in cash. Immediately upon the Second Closing, we paid $10.0 million
to partially satisfy the outstanding Senior Note. Promptly thereafter, at the Third Closing, Ault & Company purchased another 10,000
shares of Series C Convertible Preferred Stock and Series C Warrants to purchase another 84,468 shares of common stock, for a purchase
price of $10.0 million, paid in cash. Immediately upon the Third Closing, we paid $7.5 million to satisfy the remaining outstanding balance
on the outstanding Senior Note.
On December 14, 2023, we,
along with the Guarantors entered into the Loan Agreement with institutional lenders, pursuant to which Ault & Company borrowed $36
million and issued the Secured Notes to the lenders in the aggregate amount of $38.9 million.
Pursuant to the Loan Agreement,
the Guarantors, as well as Milton C. Ault, III, our Executive Chairman and the Chief Executive Officer of Ault & Company, agreed to
act as guarantors for repayment of the Secured Notes. In addition, certain Guarantors entered into various agreements as collateral in
support of the guarantee of the Secured Notes, including (i) a security agreement by Sentinum, pursuant to which Sentinum granted to the
Lenders a security interest in (a) the Miners, (b) all of the digital currency mined or otherwise generated from the Miners and (c) the
membership interests of ACS, (ii) a security agreement by the Company, Ault Lending, BNI Montana and AGREE, pursuant to which those entities
granted to the lenders a security interest in substantially all of their assets, as well as a pledge of equity interests in Ault Aviation,
AGREE, Sentinum, Third Avenue, Ault Energy, Eco Pack, and Circle 8 Holdco, (iii) a mortgage and security agreement by Third Avenue on
the Florida Property, (iv) a future advance mortgage by ACS on the Michigan Property, (v) an aircraft mortgage and security agreement
by Ault Aviation on the Aircraft, and (vi) deposit account control agreements over certain bank accounts held by certain of our subsidiaries.
In addition, pursuant to the
Loan Agreement, we agreed to establish the Segregated Account, which would be used as a further guarantee of repayment of the Secured
Notes. $3.5 million of cash was paid into the Segregated Account on the closing date. We are required to have the minimum balance in the
Segregated Account be not less than $7 million, $15 million, $20 million and $27.5 million on the five-month, nine-month, one-year and
two-year anniversaries of the closing date, respectively. In addition, starting on March 31, 2024, we are required to deposit $0.3 million
monthly into the Segregated Account, which increases to $0.4 million monthly starting March 31, 2025. Further, we agreed to deposit into
the Segregated Account, (i) up to the first $7 million of net proceeds, if any, from the sale of the Hilton Garden Inn in Madison West,
the Residence Inn in Madison West, the Courtyard in Madison West, and the Hilton Garden Inn in Rockford; (ii) 50% of cash dividends (on
a per dividend basis) received from Circle 8 on or after June 30, 2024; (iii) 30% of the net proceeds from any bond offerings we conduct,
which shall not exceed $9 million in the aggregate; and (iv) 25% of the net proceeds from cash flows, collections and revenues from loans
or other investments made by Ault Lending (including but not limited to sales of loans or investments, dividends, interest payments and
amortization payments), which shall not exceed $5 million in the aggregate. In addition, if we decide to sell certain assets, we further
agreed to deposit funds into the Segregated Account from the sale of those assets, including, (i) $15 million from the sale of the Florida
Property, (ii) $11 million from the sale of the Aircraft, (iii) $17 million from the sale of the Michigan Property, (iv) $350 per Miner,
subject to a de minimis threshold of $1 million, and (v) $10 million from the sale of Circle 8.
| | 99 | | |
| | |
Amendments to Loan and Guarantee Agreement*
On
September 17, 2024, the loan and guarantee agreement, dated as of December 14, 2023, as amended, pursuant to which the Company has guaranteed
financial obligations of Ault & Company borrowings, was amended regarding the Companys obligations to fund the restricted cash
Segregated Account.
The Company agreed to deposit
in the Segregated Account: (i) $0.4 million monthly commencing on September30, 2024 and ending on February 28, 2025; and (ii) $0.5
million monthly commencing on March 31, 2025 and ending on the earlier of the term loan maturity date, prepayment of the term loan in
full or the date on which the balance of the Segregated Account exceeds 110% of the outstanding balance of the term loan. As of December
31, 2024, the Company had deposited $18.4 million in the Segregated Account.
On
March 7, 2025 the loan and guarantee agreement, dated as of December 14, 2023, as amended, pursuant to which the Company has guaranteed
financial obligations of Ault & Company borrowings, was further amended regarding the Companys obligations to fund the restricted
cash Segregated Account.
Pursuant
to the March 7, 2025 amendment, the Company agreed to deposit in the Segregated Account: (i) $0.2 million monthly commencing on April11,
2025 and ending on June 11, 2025; and (ii) $0.4 million monthly commencing on July 11, 2025 and ending on the earlier of the term loan
maturity date, prepayment of the term loan in full or the date on which the balance of the Segregated Account exceeds 110% of the outstanding
balance of the term loan.
*Description of the Series C Convertible Preferred Stock*
Conversion Rights
Each share of Series
C Convertible Preferred Stock has a stated value of $1,000.00 and is convertible into shares of common stock at a conversion price
equal to the greater of (i) $0.10 (the Preferred Floor Price), and (ii) the lesser of (A) $0.35 or (B) 105% of the volume
weighted average price of the common stock during the ten trading days immediately prior to the date of conversion (the Series
C Conversion Price). The Series C Conversion Price is subject to adjustment in the event of an issuance of common stock at a price
per share lower than the Series C Conversion Price then in effect, as well as upon customary stock splits, stock dividends, combinations
or similar events. The Preferred Floor Price will under no circumstances be adjusted for stock dividends, stock splits, stock combinations
or similar transactions.
Voting Rights
The holders of the Series
C Preferred Stock are entitled to vote with the common stock as a single class on an as-converted basis, subject to applicable law provisions
of the Delaware General Company Law and the NYSE American, provided, however, that for purposes of complying with NYSE American regulations,
the conversion price, for purposes of determining the number of votes the holder of Series C Convertible Preferred Stock is entitled to
cast, shall not be lower than $107.625 (the Series C Voting Floor Price), which represents the closing sale price of the
common stock on the trading day immediately prior to the date of execution of the November 2023 SPA. The Series C Voting Floor Price shall
be adjusted for stock dividends, stock splits, stock combinations and other similar transactions.
In addition, Ault & Company
will be entitled to elect such number of directors to the Board as shall be equal to a percentage determined by dividing (i) the number
of shares of common stock issuable upon conversion of the Series C Preferred Stock then owned by Ault & Company (the Conversion
Shares), by (ii) the sum of the number of shares of common stock then outstanding plus the number of Conversion Shares.
| | 100 | | |
| | |
*Description of the Series C Warrants*
On each closing date, the
Company will issue Ault & Company the Series C Warrants, which grant Ault & Company the right to purchase a specified number of
common stock (the Series C Warrant Shares). The exercise price of the Series C Warrants is $118.39 (the Series C
Exercise Price) and the number of Series C Warrant Shares is determined by dividing the actual investment amount by the Series
C Exercise Price. The Series C Exercise Price is subject to adjustment in the event of customary stock splits, stock dividends, combinations
or similar events.
The Series C Warrants have
a five-year term, expiring on the fifth anniversary of the date of issuance, and become exercisable on the first business day after the
six-month anniversary of the date of issuance.
**Series G Preferred Stock Purchase Agreement**
On December 21, 2024, we entered
into the December 2024 SPA with Ault & Company, pursuant to which we agreed to sell, in one or more closings, to Ault & Company
up to 25,000 shares of Series G Convertible Preferred Stock and the Series G Warrants to purchase up to 4.2 million shares of common stock
for a total purchase price of up to $25 million.
The
December 2024 SPA shall automatically terminate if the closing has not occurred prior to December 31, 2025, though such date may be extended
by Ault & Company as set forth in the December 2024 SPA. The December 2024 SPA provides that the financing may be conducted through
one or more closings.
As
of the date of filing of this Form 10-K, Ault & Company has purchased an aggregate of 960 shares of Series G Convertible Preferred
Stock and Series G Warrants to purchase an aggregate of 162,217Warrant Shares, for an aggregate purchase price of $1.0million.
Additionally, until the earlier
of (i) four years from the initial closing date of the December 2024 SPA or (ii) the date when Ault & Company holds fewer than 5,000
shares of Series G Convertible Preferred Stock, the Company will be prohibited from (A) entering into any financing, whether debt or equity,
other than conventional loans from a commercial bank, at a price per share less than the Series G Conversion Price (as defined below)
or (B) entering into a variable rate financing transaction.
Further, for as long as Ault
& Company holds at least 5,000 shares of Series G Convertible Preferred Stock, Ault & Company shall have a right to participate
in a Subsequent Financing allowing Ault & Company to purchase such number of securities in the Subsequent Financing to allow Ault
& Company to maintain its percentage beneficial ownership of the Company that Ault & Company held immediately prior to the Subsequent
Financing.
*Description of the Series G Convertible Preferred Stock*
Conversion Rights
Each share of Series
C Convertible Preferred Stock has a stated value of $1,000.00 and is convertible into shares of common stock at a conversion price
equal to the greater of (i) the Preferred Floor Price, and (ii) the lesser of (A) $6.74 or (B) 105% of the volume weighted average price
of the common stock during the ten trading days immediately prior to the date of conversion (the Series G Conversion Price).
The Series G Conversion Price is subject to adjustment in the event of an issuance of common stock at a price per share lower than the
Series G Conversion Price then in effect, as well as upon customary stock splits, stock dividends, combinations or similar events. The
Preferred Floor Price will under no circumstances be adjusted for stock dividends, stock splits, stock combinations or similar transactions.
Voting Rights
The holders of the Series
G Preferred Stock are entitled to vote with the common stock as a single class on an as-converted basis, subject to applicable law provisions
of the Delaware General Company Law and the NYSE American, provided, however, that for purposes of complying with NYSE American regulations,
the conversion price, for purposes of determining the number of votes the holder of Series G Convertible Preferred Stock is entitled to
cast, shall not be lower than $6.244 (the Series G Voting Floor Price), which represents the closing sale price of the Class
A common stock on the trading day immediately prior to the date of execution of the December 2024 SPA plus the estimated value of the
Series G Warrants. The Series G Voting Floor Price shall be adjusted for stock dividends, stock splits, stock combinations and other similar
transactions.
| | 101 | | |
| | |
In addition, Ault & Company
will be entitled to elect such number of directors to the Board as shall be equal to a percentage determined by dividing (i) the number
of shares of common stock issuable upon conversion of the Series G Preferred Stock then owned by Ault & Company (the Conversion
Shares), by (ii) the sum of the number of shares of common stock then outstanding plus the number of Conversion Shares.
*Description of the Series G Warrants*
On each closing date, the
Company will issue Ault & Company the Series G Warrants, which grant Ault & Company the right to purchase a specified number of
shares of class A common stock (the Series G Warrant Shares). The exercise price of the Series G Warrants is $5.92 (the
Series G Exercise Price) and the number of Series G Warrant Shares is determined by dividing the actual investment amount
by the Series G Exercise Price. The Series G Exercise Price is subject to adjustment in the event of customary stock splits, stock dividends,
combinations or similar events.
The Series G Warrants have
a five-year term, expiring on the fifth anniversary of the date of issuance, and become exercisable on the first business day after the
six-month anniversary of the date of issuance.
**Nature of Related Parties**
Milton
C. Ault, III, our Executive Chairman, is also the Chief Executive Officer and a director of
Ault & Company. William B. Horne, our Chief Executive Officer and Vice Chairman, is also Chief
Financial Officer and a director of Ault & Company. Henry Nisser, our President, General Counsel and a member of our board of directors,
is also the President, General Counsel and a director of Ault & Company.
**Alzamend**
On January 31, 2024, Ault
Lending entered into the January 2024 SPA with Alzamend, pursuant to which Alzamend agreed to sell, in one or more closings, to Ault Lending
up to 6,000 shares of ALZN Series B Preferred and ALZN Series B Warrants to purchase up to 0.6 million shares of Alzamend common stock
for a total purchase price of up to $6.0 million. On January 31, 2024, Ault Lending purchased 1,220
shares of ALZN Series B Preferred and warrants to purchase 0.1 million shares for a total purchase price of $1.22 million.The purchase
price was paid by the cancellation of $1.22 million of cash advances made by Ault Lending to Alzamend between November 9, 2023 and January
31, 2023. On March 26, 2024, pursuant to the January 2024 SPA, Ault Lending purchased 780
shares of ALZN Series B Preferred Stock and ALZN Series B Warrants to
purchase 0.1 million shares of Alzamend common, for a purchase price of $780,000.As
of March 31, 2025, Ault Lending has purchased an aggregate of 2,100 shares of ALZN Series B Preferred and ALZN Series B Warrants
to purchase an aggregate of 0.2 million shares of Alzamend common stock, for an aggregate purchase
price of $2.1 million.
*Description of the ALZN Series B Preferred*
The
terms of the ALZN Series B Preferred are as set forth in the Amended and Restated Certificates of Designations of the Rights, Preferences
and Limitations of the Series B Convertible Preferred Stock, as amended (the Series B Certificate of Designation).
Each share of ALZN Series B Preferred has a stated value of $1,000 per share (the ALZN Stated Value).
The ALZN Series B Preferred does not accrue dividends.
Conversion Rights
Each
share of ALZN Series B Preferred is convertible into a number of shares of Alzamend common
stock (ALZN Conversion Shares)determined by dividing the ALZN Stated Value by
$10.00(the ALZN Conversion Price). The ALZN Conversion Price is subject to adjustment in the event of an issuance
of common stock at a price per share lower than the ALZN Conversion Price then in effect, as well as upon customary stock splits, stock
dividends, combinations or similar events.
Voting Rights
The
holders of the ALZN Series B Preferred are entitled to vote with the common stock as a single
class on an as-converted basis, subject to applicable law provisions of the Delaware General Company Law and Nasdaq, provided however,
that for purposes of complying with Nasdaq regulations, the conversion price, for purposes of determining the number of votes the holder
of ALZN Series B Preferred is entitled to cast, shall not be lower than $8.73 (the ALZN
Voting Floor Price). The ALZN Voting Floor Price shall be adjusted for stock dividends, stock splits, stock combinations and other
similar transactions.
| | 102 | | |
| | |
Liquidation Rights
In
the event of liquidation, dissolution, or winding up of Alzamend, the holders of ALZN Series B Preferred
have a preferential right to receive an amount equal to the ALZN Stated Value per share of ALZN
Series B Preferred before any distribution to other classes of capital stock. If the assets are insufficient, the distribution
will be prorated among the holders of ALZN Series B Preferred. The remaining assets, if any,
will then be distributed pro rata to the holders of outstanding Alzamend common stock. Any transaction that constitutes a change of control
transaction shall be deemed to be a liquidation under the Series B Certificate of Designation.
**
*Description of the
Series B Warrants*
At
each closing, Alzamend issued Ault Lending Series B Warrants, which grant Ault Lending the right to purchase a specified number of Alzamend
common stock (the ALZN Warrant Shares). The exercise price of the Series B Warrants is $12.00 (the ALZN Exercise
Price) and the number of ALZN Warrant Shares is equal to the number of ALZN Conversion Shares issuable upon the ALZN
Series B Preferred issued at that closing. The ALZN Exercise Price is subject to adjustment in the event of an issuance of common
stock at a price per share lower than the ALZN Exercise Price then in effect, as well as upon customary stock splits, stock dividends,
combinations or similar events.
The
Series B Warrants become exercisable on the first business day after the six-month anniversary of issuance (the ALZN Initial Exercise
Date) and have a five-year term, expiring on the fifth anniversary of the ALZN Initial Exercise Date.
**Nature of Related Parties**
Messrs. Ault, Horne and Nisser
are each paid $50,000 annually by Alzamend.
Milton
C. Ault, III, our Executive Chairman, is also the Vice Chairman of Alzamend. William
B. Horne, our Chief Executive Officer and Vice Chairman, is also the Chairman of Alzamend.
Henry Nisser, our President, General Counsel and a member of our board of directors, is also the Executive Vice President, General Counsel
and a director of Alzamend.
**AVLP**
**Nature of Related Parties**
Prior to the filing of Chapter
7 bankruptcy by AVLP in March 2025, Mr. Ault was paid $100,000 annually by AVLP, and each of Messrs. Horne and Nisser was paid $50,000
annually by AVLP.
Milton C. Ault, III and William
Horne, our Executive Chairman and Chief Executive Officer, respectively, and two of our directors are directors of AVLP. In addition,
Philou Ventures, of which Ault & Company is the Manager, is the controlling stockholder of AVLP. Mr. Ault is the Executive Chairman
of AVLP. Further, Henry Nisser, our President, General Counsel and one of our directors, is the Executive Vice President and General Counsel
of AVLP.
**Director Independence**
|
| |
Independent | |
Audit Committee | |
Nominating and Governance Committee | |
Compensation Committee | |
|
Director | |
| |
| |
| |
| |
|
Milton C. Ault III | |
No | |
| |
| |
| |
|
William B. Horne | |
No | |
| |
| |
| |
|
Henry Nisser | |
No | |
| |
| |
| |
|
Robert O. Smith | |
Yes | |
C | |
X | |
X | |
|
Jeffrey A. Bentz | |
Yes | |
X | |
X | |
C | |
|
Mordechai Rosenberg | |
Yes | |
X | |
C | |
X | |
____________
C Chairman of committee
X Member of committee
| | 103 | | |
| | |
|
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES | |
Marcum LLP served as our independent
registered public accounting firm for the years ended December 31, 2024 and 2023. Ziv Haft, a BDO Member Firm, served as the independent
registered public accounting firm of Enertec for the year ended December31, 2023.
**Fees and Services**
The following table shows
the aggregate fees billed to us for professional services by Marcum LLP for the years ended December 31, 2024 and 2023 and Ziv Haft for
the year ended December 31, 2023:
|
| |
2024 | | |
2023 | | |
|
Audit Services | |
$ | 1,623,000 | | |
$ | 2,241,000 | | |
|
Audit-Related Services | |
| | | |
| | | |
|
Tax Services | |
| | | |
| | | |
|
All Other Services | |
| | | |
| | | |
|
Total | |
$ | 1,623,000 | | |
$ | 2,241,000 | | |
*Audit Fees.*This
category includes the aggregate fees billed for professional services rendered for the audits of our financial statements for the years
ended December 31, 2024 and 2023, for the reviews of the financial statements included in our quarterly reports on Form 10-Q during 2024
and 2023, and for other services that are normally provided by the independent auditors in connection with statutory and regulatory filings
or engagements for the relevant years.
*Audit-Related Fees.*This
category includes the aggregate fees billed in each of the last two years for assurance and related services by the independent auditors
that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported above under Audit
Fees, and generally consist of fees for other engagements under professional auditing standards, accounting and reporting consultations,
internal control-related matters, and audits of employee benefit plans.
*Tax Fees*. This category
includes the aggregate fees billed in each of the last two years for professional services rendered by the independent auditors for tax
compliance, tax planning and tax advice.
*All Other Fees.*This
category includes the aggregate fees billed in each of the last two years for products and services provided by the independent auditors
that are not reported above under Audit Fees, Audit-Related Fees, or Tax Fees.
The Audit Committees
policy is to pre-approve all services provided by our independent auditors. These services may include audit services, audit-related services,
tax services and other services. The Audit Committee may also pre-approve particular services on a case-by-case basis. Our independent
auditors are required to report periodically to the Audit Committee regarding the extent of services they provide in accordance with such
pre-approval.
| | 104 | | |
| | |
**PART IV**
|
ITEM 15. | EXHIBITS | |
|
Exhibit
Number |
|
Description | |
|
2.1 |
|
Agreement and Plan of Merger dated January 7, 2021. Incorporated by reference to the Current Report on Form 8-K filed on January 19, 2021 as Exhibit 3.1 thereto. | |
|
2.2 |
|
Agreement and Plan of Merger dated December 1, 2021. Incorporated by reference to the Current Report on Form 8-K filed on December 13, 2021 as Exhibit 2.1 thereto. | |
|
2.3 |
|
Agreement and Plan of Merger dated December 20, 2022. Incorporated by reference to the Current Report on Form 8-K filed on December 21, 2022 as Exhibit 2.1 thereto. | |
|
3.1 |
|
Certificate of Incorporation, dated September 22, 2017.Incorporated herein by reference to the Current Report on Form 8-K filed on December 29, 2017 as Exhibit 3.1 thereto. | |
|
3.2 |
|
Certificate of Designations of Rights and Preferences of 10% Series A Cumulative Redeemable Perpetual Preferred Stock, dated September 13, 2018. Incorporated herein by reference to the Current Report on Form 8-K filed on September 14, 2018 as Exhibit 3.1thereto. | |
|
3.3 |
|
Certificate of Amendment to Certificate of Incorporation, dated January 2, 2019. Incorporated by reference to the Current Report on Form 8-K filed on January 3, 2019 as Exhibit 3.1 thereto. | |
|
3.4 |
|
Certificate of Amendment to Certificate of Incorporation (1-for-20 Reverse Stock Split of Common Stock), dated March 14, 2019. Incorporated herein by reference to the Current Report on Form 8-K filed on March 14, 2019 as Exhibit 3.1 thereto. | |
|
3.5 |
|
Certificate of Ownership and Merger. Incorporated by reference to the Current Report on Form 8-K filed on January 19, 2021 as Exhibit 2.1 thereto. | |
|
3.6 |
|
Certificate of Ownership and Merger, as filed with the Secretary of State of the State of Delaware on December 1, 2021. Incorporated by reference to the Current Report on Form 8-K filed on December 13, 2021 as Exhibit 3.1 thereto. | |
|
3.7 |
|
Certificate of Designation, Preferences and Rights relating to the 13.00% Series D Cumulative Redeemable Perpetual Preferred Stock, dated May 25, 2022. Incorporated by reference to the Registration Statement on Form 8-A filed on May 26, 2022 as Exhibit 3.6 thereto. | |
|
3.8 |
|
Certificate of Increase of the Designated Number of Shares of 13.00% Series D Cumulative Redeemable Perpetual Preferred Stock, dated June 10, 2022. Incorporated by reference to the Current Report on Form 8-K filed on June 14, 2022 as Exhibit 3.1 thereto. | |
|
3.9 |
|
Certificate of Correction to the Certificate of Designation, Rights and Preferences of 13.00% Series D Cumulative Redeemable Perpetual Preferred Stock, dated June 16, 2022. Incorporated by reference to the Current Report on Form 8-K filed on June 17, 2022 as Exhibit 3.1 thereto. | |
|
3.10 |
|
Certificate of Amendment to Certificate of Incorporation (1-for-300 Reverse Stock Split of Common Stock), dated May 15, 2023. Incorporated herein by reference to the Current Report on Form 8-K filed on May 16, 2023 as Exhibit 3.1 thereto. | |
|
3.11 |
|
Certificate of Elimination of the Series E convertible redeemable preferred stock of Hyperscale Data, Inc. Incorporated herein by reference to the Current Report on Form 8-K filed on August 18, 2023 as Exhibit 3.1 thereto. | |
|
3.12 |
|
Certificate of Elimination of the Series F convertible redeemable preferred stock of Hyperscale Data, Inc. Incorporated herein by reference to the Current Report on Form 8-K filed on August 18, 2023 as Exhibit 3.2 thereto. | |
|
3.13 |
|
Certificate of Elimination of the Series G convertible redeemable preferred stock of Hyperscale Data, Inc. Incorporated herein by reference to the Current Report on Form 8-K filed on August 18, 2023 as Exhibit 3.3 thereto. | |
|
3.14 |
|
Certificate of Designation of Preferences, Rights and Limitations of Series C Cumulative Preferred Stock, dated November 15, 2023. Incorporated herein by reference to the Current Report on Form 8-K filed on November 21, 2023 as Exhibit 3.1 thereto. | |
|
3.15 |
|
Certificate of Elimination of the Series B convertible redeemable preferred stock of Hyperscale Data, Inc. Incorporated herein by reference to the Current Report on Form 8-K filed on December 12, 2023 as Exhibit 3.1 thereto. | |
|
3.16 |
|
Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on January 12, 2024. Incorporated by reference to the Current Report on Form 8-K filed on January 12, 2024 as Exhibit 3.2 thereto. | |
|
3.17 |
|
Second Amended and Restated Bylaws, effective as of January 11, 2024. Incorporated by reference to the Current Report on Form 8-K filed on January 12, 2024 as Exhibit 3.1 thereto. | |
|
3.18 |
|
Certificate of Increase to Certificate Designations of Preferences, Rights and Limitations of Series C Convertible Preferred Stock. Incorporated herein by reference to the Current Report on Form 8-K filed on April 4, 2024 as Exhibit 3.1 thereto. | |
|
3.19 |
|
Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on September 6, 2024 and effective September 10, 2024. Incorporated herein by reference to the Current Report on Form 8-K filed on September 6, 2024 as Exhibit 3.1 thereto. | |
|
3.20 |
|
Certificate of Designation, Preferences and Rights relating to the 10.00% Series E Cumulative Redeemable Perpetual Preferred Stock, dated November 11, 2024. Incorporated by reference to the Current Report on Form 8-K filed on November 12, 2024 as Exhibit 3.1 thereto. | |
| | 105 | | |
| | |
|
Exhibit
Number |
|
Description | |
|
3.21 |
|
Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on November 20, 2024. Incorporated herein by reference to the Current Report on Form 8-K filed on November 20, 2024 as Exhibit 3.1 thereto. | |
|
3.22 |
|
Certificate of Designation, Preferences and Rights relating to the Series F Exchangeable Preferred Stock, dated November 22, 2024. Incorporated by reference to the Current Report on Form 8-K filed on November 25, 2024 as Exhibit 3.1 thereto. | |
|
3.23 |
|
Form of Certificate of Designation of Preferences, Rights and Limitations of Series G Cumulative Preferred Stock, dated December 21, 2024. Incorporated herein by reference to the Current Report on Form 8-K filed on December 23, 2024 as Exhibit 4.1 thereto. | |
|
3.24 |
|
Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on February 5, 2025. Incorporated herein by reference to the Current Report on Form 8-K filed on February 10, 2025 as Exhibit 3.1 thereto. | |
|
3.25 |
|
Certificate of Designation of Preferences, Rights and Limitations of Series B Cumulative Preferred Stock, dated March 31, 2025. Incorporated herein by reference to the Current Report on Form 8-K filed on April 1, 2025 as Exhibit 3.1 thereto. | |
|
4.1 |
|
Form of Warrant, dated as of May 28, 2020. Incorporated by reference to the Current Report on Form 8-K filed on May 29, 2020 as Exhibit 4.3 thereto. | |
|
4.2 |
|
Form of Warrant, dated June 26, 2020. Incorporated by reference to the Current Report on Form 8-K filed on June 29, 2020 as Exhibit 4.2 thereto. | |
|
4.3 |
|
Form of Warrant. Incorporated by reference to the Current Report on Form 8-K filed on July 17, 2020 as Exhibit 4.2 thereto. | |
|
4.4 |
|
Form of Warrant, dated October 22, 2020. Incorporated by reference to the Current Report on Form 8-K filed on October 23, 2020 as Exhibit 4.2 thereto. | |
|
4.5 |
|
Form of Warrant dated October 27, 2020. Incorporated by reference to the Current Report on Form 8-K filed on October 27, 2020 as Exhibit 4.3 thereto. | |
|
4.6 |
|
Form of Warrant dated October 27, 2020. Incorporated by reference to the Current Report on Form 8-K filed on October 27, 2020 as Exhibit 4.4 thereto. | |
|
4.7 |
|
Form of Warrant issued to Esousa Holdings, LLC, dated November 19, 2020. Incorporated by reference to the Current Report on Form 8-K filed on November 20, 2020 as Exhibit 4.3 thereto. | |
|
4.8 |
|
Form of Senior Indenture between BitNile Holdings, Inc. and the Trustee. Incorporated by reference to the Registration Statement on Form S-3 filed on October 29, 2021 as Exhibit 4.1 thereto. | |
|
4.9 |
|
Form of Subordinated Indenture between BitNile Holdings, Inc. and the Trustee. Incorporated by reference to the Registration Statement on Form S-3 filed on October 29, 2021 as Exhibit 4.2 thereto. | |
|
4.10 |
|
Form of Class A Warrant, dated December 29, 2021.Incorporated by reference to the Current Report on Form 8-K filed on January 3, 2022 as Exhibit 4.2 thereto. | |
|
4.11 |
|
Form of Class B Warrant, dated December 29, 2021.Incorporated by reference to the Current Report on Form 8-K filed on January 3, 2022 as Exhibit 4.3 thereto. | |
|
4.12 |
|
Form of Note. Incorporated by reference to the Current Report on Form 8-K filed on August 11, 2022 as Exhibit 4.1 thereto. | |
|
4.13 |
|
Form of Class A Warrant. Incorporated by reference to the Current Report on Form 8-K filed on November 8, 2022 as Exhibit 4.1 thereto. | |
|
4.14 |
|
Form of Class B Warrant. Incorporated by reference to the Current Report on Form 8-K filed on November 8, 2022 as Exhibit 4.2 thereto. | |
|
4.15 |
|
Form of Note. Incorporated by reference to the Current Report on Form 8-K filed on December 19, 2022 as Exhibit 4.1 thereto. | |
|
4.16 |
|
Form of amendment #1 to senior secured promissory note. Incorporated by reference to the Quarterly Report on Form 10-Q filed on May 22, 2023 as Exhibit 10.7 thereto. | |
|
4.17 |
|
Form of 7.00% Senior Note due 2024.Incorporated by reference to the Current Report on Form 8-K filed on September 1, 2023 as Exhibit 4.1 thereto. | |
|
4.18 |
|
Form of 8.50% Senior Note due 2026. Incorporated by reference to the Current Report on Form 8-K filed on September 1, 2023 as Exhibit 4.2 thereto. | |
|
4.19 |
|
Form of 10.50% Senior Note due 2028. Incorporated by reference to the Current Report on Form 8-K filed on September 1, 2023 as Exhibit 4.3 thereto. | |
|
4.20 |
|
Form of Note. Incorporated by reference to the Current Report on Form 8-K filed on September 28, 2023 as Exhibit 4.1 thereto. | |
|
4.21 |
|
Form of Warrant issued October 13, 2023. Incorporated by reference to the Current Report on Form 8-K filed on October 16, 2023 as Exhibit 4.2 thereto. | |
|
4.22 |
|
Form of Warrant. Incorporated by reference to the Current Report on Form 8-K filed on November 7, 2023 as Exhibit 10.2 thereto. | |
|
4.23 |
|
Securities Purchase Agreement, dated as of November 14, 2023, by and between Hyperscale Data, Inc. and RiskOn International, Inc. Incorporated by reference to the Current Report on Form 8-K filed on November 15, 2023 as Exhibit 10.1 thereto. | |
| | 106 | | |
| | |
|
Exhibit
Number |
|
Description | |
|
4.24 |
|
Form of Certificate of Designations of Rights, Preferences and Limitations of Series D Convertible Preferred Stock of RiskOn International, Inc. Incorporated by reference to the Current Report on Form 8-K filed on November 15, 2023 as Exhibit 10.2 thereto. | |
|
4.25 |
|
Note Purchase Agreement, dated March 11, 2024, by and among the Company and the Investors. Incorporated by reference to the Current Report on Form 8-K filed on March 12, 2024 as Exhibit 10.1 thereto. | |
|
4.26 |
|
Form of Note. Incorporated by reference to the Current Report on Form 8-K filed on March 12, 2024 as Exhibit 4.1 thereto. | |
|
4.27 |
|
Form of Term Note. Incorporated by reference to the Current Report on Form 8-K filed on April 30, 2024 as Exhibit 4.1 thereto. | |
|
4.28 |
|
Form of Note. Incorporated by reference to the Current Report on Form 8-K filed on July 19, 2024 as Exhibit 4.1 thereto. | |
|
4.29 |
|
Note Purchase Agreement, dated July 18, 2024, by and among the Company and Esousa Group Holdings, LLC. Incorporated by reference to the Current Report on Form 8-K filed on July 19, 2024 as Exhibit 10.1 thereto. | |
|
4.30 |
|
Form of Forbearance Note. Incorporated by reference to the Current Report on Form 8-K filed on December 11, 2024 as Exhibit 4.1 thereto. | |
|
4.31 |
|
Securities Purchase Agreement, dated as of December 21, 2024, by and between the Company and Ault & Company, Inc. Incorporated by reference to the Current Report on Form 8-K filed on December 23, 2024 as Exhibit 10.1 thereto. | |
|
4.32 |
|
Form of Warrant. Incorporated by reference to the Current Report on Form 8-K filed on January 6, 2025 as Exhibit 10.2 thereto. | |
|
4.33 |
|
Form of Convertible Promissory Note. Incorporated by reference to the Current Report on Form 8-K filed on February 6, 2025 as Exhibit 4.1 thereto. | |
|
4.34 |
|
Form of Amended and Restated Forbearance Note. Incorporated by reference to the Current Report on Form 8-K filed on February 26, 2025 as Exhibit 4.1 thereto. | |
|
4.35 |
|
Form of Convertible Promissory Note. Incorporated by reference to the Current Report on Form 8-K filed on March 17, 2025 as Exhibit 4.1 thereto. | |
|
4.36 |
|
Form of Convertible Promissory Note. Incorporated by reference to the Current Report on Form 8-K filed on March 24, 2025 as Exhibit 4.1 thereto. | |
|
4.37 |
|
Form of Convertible Promissory Note. Incorporated by reference to the Current Report on Form 8-K filed on April 1, 2025 as Exhibit 4.1 thereto. | |
|
4.38 |
|
Form of Convertible Promissory Note. Incorporated by reference to the Current Report on Form 8-K filed on April 9, 2025 as Exhibit 4.1 thereto. | |
|
4.39** |
|
Description of Capital Stock. | |
|
10.1* |
|
2021 Stock Incentive Plan. Incorporated by reference to the Companys Definitive Proxy Statement on Form DEF 14A filed on July 6, 2021 as Appendix B thereto. | |
|
10.2* |
|
2021 Employee Stock Purchase Plan. Incorporated by reference to the Companys Definitive Proxy Statement on Form DEF 14A filed on July 6, 2021 as Appendix C thereto. | |
|
10.3* |
|
Form of Stock Option Grants. Incorporated by reference to the Companys Registration Statement on Form S-8 filed on August 26, 2021 as Exhibit 99.3 thereto. | |
|
10.4* |
|
Form of Restricted Stock Unit Grants. Incorporated by reference to the Companys Registration Statement on Form S-8 filed on August 26, 2021 as Exhibit 99.4 thereto. | |
|
10.5 |
|
Form of Construction Loan Agreement. Incorporated by reference to the Current Report on Form 8-K filed on December 23, 2021 as Exhibit 10.1 thereto. | |
|
10.6 |
|
Form of Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Filing. Incorporated by reference to the Current Report on Form 8-K filed on December 23, 2021 as Exhibit 10.2 thereto. | |
|
10.7 |
|
Form of Assignment of Leases, Rents and Profits. Incorporated by reference to the Current Report on Form 8-K filed on December 23, 2021 as Exhibit 10.3 thereto. | |
|
10.8 |
|
Form of Guaranty. Incorporated by reference to the Current Report on Form 8-K filed on December 23, 2021 as Exhibit 10.4 thereto. | |
|
10.9* |
|
2022 Stock Incentive Plan. Incorporated by reference to the Companys Definitive Proxy Statement on Form DEF 14A filed on September 23, 2022 as Annex B thereto. | |
|
10.10 |
|
Form of Share Exchange Agreement, entered into February 8, 2023. Incorporated by reference to the Current Report on Form 8-K filed on February 10, 2023 as Exhibit 10.1 thereto. | |
|
10.11 |
|
Form of Series B Preferred Stock Certificate of Designations.Incorporated by reference to the Current Report on Form 8-K filed on February 10, 2023 as Exhibit 10.2 thereto. | |
|
10.12 |
|
Form of Series C Preferred Stock Certificate of Designations. Incorporated by reference to the Current Report on Form 8-K filed on February 10, 2023 as Exhibit 10.3 thereto. | |
|
10.13 |
|
Form of Hyperscale Data, Inc. Investor Agreement relating to 7.00% Senior Notes due 2024, 8.50% Senior Notes due 2026 and 10.50% Senior Notes due 2028. Incorporated by reference to the Current Report on Form 8-K filed on September 1, 2023 as Exhibit 10.1 thereto. | |
|
10.14 |
|
Securities Purchase Agreement, dated November 6, 2023, by and between Hyperscale Data, Inc. and Ault & Company, Inc.Incorporated by reference to the Current Report on Form 8-K filed on November 7, 2023 as Exhibit 10.1 thereto. | |
| | 107 | | |
| | |
|
Exhibit
Number |
|
Description | |
|
10.15 |
|
Form of Loan and Guaranty Agreement, dated December 14, 2023.Incorporated by reference to the Current Report on Form 8-K filed on December 15, 2023 as Exhibit 10.1 thereto. | |
|
10.16 |
|
Form of Security Agreement.Incorporated by reference to the Current Report on Form 8-K filed on December 15, 2023 as Exhibit 10.2 thereto. | |
|
10.17 |
|
Form of Security Agreement.Incorporated by reference to the Current Report on Form 8-K filed on December 15, 2023 as Exhibit 10.3 thereto. | |
|
10.18 |
|
Form of Michigan Mortgage.Incorporated by reference to the Current Report on Form 8-K filed on December 15, 2023 as Exhibit 10.5 thereto. | |
|
10.19 |
|
Form of Aircraft Mortgage.Incorporated by reference to the Current Report on Form 8-K filed on December 15, 2023 as Exhibit 10.6 thereto. | |
|
10.20 |
|
Amendment to the Securities Purchase Agreement, Certificate of Designation and Series C Warrants, dated March 25, 2024. Incorporated by reference to the Current Report on Form 8-K filed on March 26, 2024 as Exhibit 10.3 thereto. | |
|
10.21 |
|
Luxor Mining Pool Service Level Agreement, dated March 28, 2023, by and between Bitnile Inc. (n/k/a Sentinum Inc.) and Luxor Technology Corporation. Incorporated by reference to the Annual Report on Form 10-K filed on April 16, 2024 as Exhibit 10.28 thereto. | |
|
10.22 |
|
Amendment to the Loan and Guaranty Agreement, dated April 15, 2024. Incorporated by reference to the Current Report on Form 8-K filed on April 16, 2024 as Exhibit 10.1 thereto. | |
|
10.23 |
|
Form of Guaranty. Incorporated by reference to the Current Report on Form 8-K filed on April 30, 2024 as Exhibit 10.1 thereto. | |
|
10.24 |
|
Form of Second Amendment to Loan and Guaranty Agreement, dated May 15, 2024. Incorporated by reference to the Current Report on Form 8-K filed on May 16, 2024 as Exhibit 10.1 thereto. | |
|
10.25 |
|
Form of Loan Agreement. Incorporated by reference to the Current Report on Form 8-K filed on June 5, 2024 as Exhibit 10.1 thereto. | |
|
10.26 |
|
Form of Guaranty. Incorporated by reference to the Current Report on Form 8-K filed on June 5, 2024 as Exhibit 10.2 thereto. | |
|
10.27 |
|
Purchase Agreement, dated June 20, 2024, by and between Hyperscale Data, Inc. and Orion Equity Partners, LLC. Incorporated by reference to the Current Report on Form 8-K filed on June 21, 2024 as Exhibit 10.1 thereto. | |
|
10.28 |
|
Contract dated October 23, 2021 by and between Indiana Michigan Power Company and Alliance Cloud Services, a subsidiary of Hyperscale Data, Inc | |
|
10.29 |
|
Amendment to the Securities Purchase Agreement, dated March 30, 2025, by and between the Company and Ault & Company, Inc. Incorporated by reference to the Current Report on Form 8-K filed on April1 , 2025 as Exhibit 10.1 thereto. | |
|
10.30 |
|
First Supplement and Amendment dated November 1, 2024 by and among Hyperscale Data, Inc., Orion Equity Partners, LLC and Ascendiant Capital Markets, LLC. Incorporated by reference to the Current Report on Form 8-K filed on November 1, 2024 as Exhibit 10.1 thereto. | |
|
10.31 |
|
Form of Forbearance Agreement. Incorporated by reference to the Current Report on Form 8-K filed on December 11, 2024 as Exhibit 10.1 thereto. | |
|
10.32 |
|
Second Supplement and Amendment to Purchase Agreement dated January 9, 2025 by and among Hyperscale Data, Inc., Orion Equity Partners, LLC, Ascendiant Capital Markets, LLC and Northland Securities, Inc. Incorporated by reference to the Registration Statement on Form S-1/A filed on January 14, 2025 as Exhibit 10.40 thereto. |
|
|
10.33 |
|
First Amendment to Loan Agreement dated January 9, 2025 by and among Hyperscale Data, Inc., OREE Lending Company, LLC and Helios Funds LLC. Incorporated by reference to the Registration Statement on Form S-1/A filed on January 14, 2025 as Exhibit 10.41 thereto. |
|
|
10.34 |
|
Exchange Agreement, dated February 5, 2025, by and between the Company and the Investor. Incorporated by reference to the Current Report on Form 8-K filed on February 6, 2025 as Exhibit 10.1 thereto. |
|
|
10.35 |
|
Form of Amended and Restated Forbearance Agreement. Incorporated by reference to the Current Report on Form 8-K filed on February 26, 2025 as Exhibit 10.1 thereto. |
|
|
10.36 |
|
Exchange Agreement, dated March 14, 2025, by and between the Company and the Investor. Incorporated by reference to the Current Report on Form 8-K filed on March 17, 2025 as Exhibit 10.1 thereto. |
|
|
10.37 |
|
Exchange Agreement, dated March 21, 2025, by and between the Company and the Investor. Incorporated by reference to the Current Report on Form 8-K filed on March 24, 2025 as Exhibit 10.1 thereto. |
|
|
10.38 |
|
Amendment to the Securities Purchase Agreement, dated March 30, 2025, by and between the Company and Ault & Company, Inc. Incorporated by reference to the Current Report on Form 8-K filed on April1 , 2025 as Exhibit 10.1 thereto. |
|
|
10.39 |
|
Securities Purchase Agreement, dated March 31, 2025, by and between Hyperscale Data, Inc. and SJC Lending, LLC.Incorporated by reference to the Current Report on Form 8-K filed on April 1, 2025 as Exhibit 10.1 thereto. |
|
|
10.40 |
|
Registration Rights Agreement, dated March 31, 2025, by and between Hyperscale Data, Inc. and SJC Lending, LLC.Incorporated by reference to the Current Report on Form 8-K filed on April 1, 2025 as Exhibit 10.2 thereto. |
|
|
19.1** |
|
Insider Trading Policy of Hyperscale Data, Inc. |
|
|
21** |
|
List of subsidiaries. | |
|
31.1** |
|
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
| | 108 | | |
| | |
|
Exhibit
Number |
|
Description | |
|
31.2** |
|
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
|
32.1*** |
|
Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. | |
|
97.1** |
|
Hyperscale Data, Inc. Clawback Policy. Incorporated by reference to the Annual Report on Form 10-K filed on April 16, 2024 as Exhibit 97.2 thereto. | |
|
101.INS** |
|
Inline XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
|
101.SCH** |
|
Inline XBRL Taxonomy Extension Schema Document. |
| |
|
101.CAL** |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
|
101.DEF** |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
|
101.LAB** |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. | |
|
101.PRE** |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |
|
* | Indicates management contract or compensatory plan or arrangement. | |
|
** | Filed herewith. | |
|
*** | Furnished herewith. | |
|
ITEM 16. | FORM 10K SUMMARY | |
None.
| | 109 | | |
| | |
**SIGNATURES**
Pursuant to the requirements of Section13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated:April 15, 2025
|
|
HYPERSCALE DATA, INC. |
| |
|
|
|
|
| |
|
|
By: |
/s/ William B. Horne |
| |
|
|
|
William B. Horne |
| |
|
|
|
Chief Executive Officer |
| |
|
|
|
(Principal Executive Officer) |
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
By: |
/s/ Kenneth S. Cragun |
| |
|
|
|
Kenneth S. Cragun |
| |
|
|
|
Chief Financial Officer |
| |
|
|
|
(Principal Financial and Accounting Officer) |
| |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.
|
April 15, 2025 |
/s/ Milton C. Ault, III | |
|
|
Milton C. Ault, III, Executive Chairman of the Board | |
|
|
| |
|
April 15, 2025 |
/s/ William B. Horne | |
|
|
William B. Horne, Chief Executive Officer and Director | |
|
|
| |
|
April 15, 2025 |
/s/ Henry Nisser | |
|
|
Henry Nisser, President, General Counsel and Director | |
|
|
| |
|
April 15, 2025 |
/s/ Robert O. Smith | |
|
|
Robert O. Smith, Director | |
|
|
| |
|
April 15, 2025 |
/s/ Mordechai Rosenberg | |
|
|
Mordechai Rosenberg, Director | |
|
|
| |
|
April 15, 2025 |
/s/ Jeffrey A. Bentz | |
|
|
Jeffrey A. Bentz, Director | |
| | 110 | | |
| | |
|
ITEM 8. | FINANCIAL STATEMENTS | |
**HYPERSCALE DATA, INC. AND SUBSIDIARIES**
**INDEX TO FINANCIAL STATEMENTS**
|
Report of Independent Registered Public Accounting Firm Marcum LLP (PCAOB ID Number 688) |
|
F-2 | |
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Consolidated Balance Sheets as of December 31, 2024 and 2023 |
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F-4 | |
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Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2024 and 2023 |
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F-6 | |
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Consolidated Statements of Changes in Stockholders Equity for the Years Ended December 31, 2024 and 2023 |
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F-7 | |
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Consolidated Statements of Cash Flows for the Years Ended December 31, 2024 and 2023 |
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F-9 | |
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Notes to Consolidated Financial Statements |
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F-11 | |
| | F-1 | | |
| | |
**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
To the Shareholders and Board of Directors of
Hyperscale Data, Inc. and Subsidiaries (f/k/a
Ault Alliance, Inc.)
**Opinion on the Financial Statements**
****
We have audited the accompanying consolidated
balance sheet**s**of Hyperscale Data, Inc. (the Company) (f/k/a Ault Alliance, Inc.) as of December 31, 2024, the related
consolidated statements of operations and comprehensive loss, changes in stockholders equity and cash flows for each of the two
years in the period ended December 31, 2024 and 2023, and the related notes (collectively referred to as the financial statements).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2024, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024 and 2023,
in conformity with accounting principles generally accepted in the United States of America.
**Explanatory Paragraph Going Concern**
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant
working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its
operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
**Basis for Opinion**
These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
**Critical Audit Matter**
The critical audit matters communicated below
are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to
the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions
on the critical audit matters or on the accounts or disclosures to which they relate.
*Evaluation
of the Accounting for and Disclosure of Bitcoin Mining Revenue*
As disclosed in Note 3, the Company participates
in a digital asset mining pool by providing hash calculation services to the mining pool operator. During the years ended December 31,
2024 and 2023, the Company recognized revenue from bitcoin mining of approximately $30.6 million and $33.1 million, respectively.
| | F-2 | | |
| | |
We identified the auditing of revenue recognized
from bitcoin mining as a critical audit matter due to the nature and extent of audit effort required to perform audit procedures over
the completeness and occurrence of bitcoin mining revenue recognized by the Company.
The primary procedures we performed to address
this critical audit matter included the following:
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| We performed site visits of the facilities where the Companys mining hardware is located, which
included observations of the physical controls and mining equipment observation procedures. | |
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| On a sample basis, we tested the hash calculation services contributed by the Companys mining hardware. | |
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| We performed certain substantive analytical procedures developing an expectation for the amount to be
recorded using hash calculation services data, the calculation prescribed in the contract with the mining pool operator and electricity
consumption data and comparing our expectation to the amount recorded by the Company. | |
|
| We evaluated and tested managements valuation of bitcoin earned by obtaining independent bitcoin
prices and comparing those to the prices used by the Company. | |
|
| We obtained and evaluated the contract with the third-party mining pool operator and independently confirmed
with the third-party mining pool operator the significant contractual terms utilized in the determination of mining revenue, total mining
rewards earned, and the digital asset wallet addresses in which the rewards are deposited. | |
|
| We independently obtained evidence from the Bitcoin blockchain to test the occurrence and accuracy of
mining revenue. | |
/s/ Marcum llp
Marcum LLP
We have served as the Companys auditor since 2016.
New York, New York
April 15, 2025
| | F-3 | | |
| | |
**HYPERSCALE DATA, INC. AND SUBSIDIARIES**
**CONSOLIDATED BALANCE SHEETS**
|
| |
| | |
| | |
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| |
December 31, | | |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
ASSETS | |
| | |
| | |
|
CURRENT ASSETS | |
| | |
| | |
|
Cash and cash equivalents | |
$ | 4,546,000 | | |
$ | 6,106,000 | | |
|
Restricted cash | |
| 20,476,000 | | |
| 4,962,000 | | |
|
Accounts receivable, net | |
| 6,165,000 | | |
| 6,736,000 | | |
|
Inventories | |
| 1,817,000 | | |
| 1,790,000 | | |
|
Investment in promissory notes and other, related party | |
| 20,802,000 | | |
| 3,968,000 | | |
|
Loans receivable, current | |
| 1,369,000 | | |
| 1,234,000 | | |
|
Prepaid expenses and other current assets | |
| 3,238,000 | | |
| 5,247,000 | | |
|
Current assets of discontinued operations | |
| - | | |
| 32,367,000 | | |
|
TOTAL CURRENT ASSETS | |
| 58,413,000 | | |
| 62,410,000 | | |
|
| |
| | | |
| | | |
|
Cash and marketable securities held in trust account | |
| - | | |
| 2,200,000 | | |
|
Intangible assets, net | |
| 1,844,000 | | |
| 4,047,000 | | |
|
Property and equipment, net | |
| 144,357,000 | | |
| 195,666,000 | | |
|
Right-of-use assets | |
| 3,697,000 | | |
| 3,409,000 | | |
|
Investments in common stock and equity securities, related party | |
| 2,190,000 | | |
| 679,000 | | |
|
Investments in other equity securities | |
| 2,802,000 | | |
| 21,767,000 | | |
|
Other assets | |
| 7,463,000 | | |
| 9,012,000 | | |
|
TOTAL ASSETS | |
$ | 220,766,000 | | |
$ | 299,190,000 | | |
|
| |
| | | |
| | | |
|
LIABILITIES AND STOCKHOLDERS EQUITY | |
| | | |
| | | |
|
| |
| | | |
| | | |
|
CURRENT LIABILITIES | |
| | | |
| | | |
|
Accounts payable and accrued expenses | |
$ | 59,475,000 | | |
$ | 55,422,000 | | |
|
Operating lease liability, current | |
| 1,627,000 | | |
| 1,376,000 | | |
|
Notes payable, current | |
| 95,768,000 | | |
| 11,692,000 | | |
|
Notes payable, related party, current | |
| 164,000 | | |
| 2,375,000 | | |
|
Convertible notes payable, current | |
| 19,569,000 | | |
| 7,375,000 | | |
|
Guarantee liability | |
| 38,900,000 | | |
| 38,900,000 | | |
|
Current liabilities of discontinued operations | |
| - | | |
| 22,664,000 | | |
|
TOTAL CURRENT LIABILITIES | |
| 215,503,000 | | |
| 139,804,000 | | |
|
| |
| | | |
| | | |
|
LONG TERM LIABILITIES | |
| | | |
| | | |
|
Operating lease liability, non-current | |
| 2,269,000 | | |
| 2,163,000 | | |
|
Notes payable, non-current | |
| 904,000 | | |
| 85,420,000 | | |
|
Convertible notes payable, non-current | |
| - | | |
| 9,453,000 | | |
|
Deferred underwriting commissions of Ault Disruptive Technologies Corporation (Ault Disruptive) subsidiary | |
| - | | |
| 3,450,000 | | |
|
TOTAL LIABILITIES | |
| 218,676,000 | | |
| 240,290,000 | | |
The accompanying notes are an integral part of these consolidated
financial statements.
| | F-4 | | |
| | |
**HYPERSCALE DATA, INC. AND SUBSIDIARIES**
**CONSOLIDATED BALANCE SHEETS (continued)**
|
| |
December 31, | | |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
COMMITMENTS AND CONTINGENCIES | |
| | |
| | |
|
| |
| | |
| | |
|
Redeemable non-controlling interests in equity of subsidiaries | |
| - | | |
| 2,224,000 | | |
|
| |
| | | |
| | | |
|
STOCKHOLDERS EQUITY | |
| | | |
| | | |
|
Preferred stock, $0.001 par value -
25,000,000 shares authorized; 2,029,450 and 473,737
shares issued and outstanding at December 31, 2024 and December 31, 2023, respectively (liquidation preference of $75,521,000
as of December 31, 2024) | |
| 2,000 | | |
| - | | |
|
Class A Common Stock, $0.001 par value 500,000,000 shares authorized; 1,259,893 and 127,322 shares issued and outstanding at December 31, 2024 and December 31, 2023, respectively | |
| 1,000 | | |
| - | | |
|
Class B Common Stock, $0.001 par value 25,000,000 shares authorized; 4,998,597 and 0 shares issued and outstanding at December 31, 2024 and December31, 2023 | |
| 5,000 | | |
| - | | |
|
Additional paid-in capital | |
| 668,817,000 | | |
| 644,856,000 | | |
|
Accumulated deficit | |
| (628,950,000 | ) | |
| (567,469,000 | ) | |
|
Accumulated other comprehensive loss | |
| (668,000 | ) | |
| (2,097,000 | ) | |
|
Treasury stock, at cost | |
| (30,571,000 | ) | |
| (30,571,000 | ) | |
|
TOTAL HYPERSCALE DATA STOCKHOLDERS EQUITY | |
| 8,636,000 | | |
| 44,719,000 | | |
|
| |
| | | |
| | | |
|
Non-controlling interest | |
| (6,546,000 | ) | |
| 11,957,000 | | |
|
| |
| | | |
| | | |
|
TOTAL STOCKHOLDERS EQUITY | |
| 2,090,000 | | |
| 56,676,000 | | |
|
| |
| | | |
| | | |
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY | |
$ | 220,766,000 | | |
$ | 299,190,000 | | |
The accompanying notes are an integral part of these consolidated
financial statements.
| | F-5 | | |
| | |
**HYPERSCALE DATA, INC. AND SUBSIDIARIES**
**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**
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| | | |
| | | |
|
| |
For the Year Ended | | |
|
| |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Revenue, crane operations | |
$ | 47,475,000 | | |
$ | 49,198,000 | | |
|
Revenue, crypto assets mining | |
| 30,598,000 | | |
| 33,107,000 | | |
|
Revenue, hotel and real estate operations | |
| 18,891,000 | | |
| 17,577,000 | | |
|
Revenue, lending and trading activities | |
| 1,893,000 | | |
| (1,998,000 | ) | |
|
Revenue, other | |
| 7,805,000 | | |
| 36,962,000 | | |
|
Total revenue | |
| 106,662,000 | | |
| 134,846,000 | | |
|
Cost of revenue, crane operations | |
| 30,745,000 | | |
| 29,971,000 | | |
|
Cost of revenue, crypto assets mining | |
| 34,338,000 | | |
| 36,446,000 | | |
|
Cost of revenue, hotel and real estate operations | |
| 12,928,000 | | |
| 12,300,000 | | |
|
Cost of revenue, lending and trading activities | |
| (1,205,000 | ) | |
| 1,180,000 | | |
|
Cost of revenue, other | |
| 5,639,000 | | |
| 30,165,000 | | |
|
Total cost of revenue | |
| 82,445,000 | | |
| 110,062,000 | | |
|
Gross profit | |
| 24,217,000 | | |
| 24,784,000 | | |
|
Operating expenses | |
| | | |
| | | |
|
Research and development | |
| 11,011,000 | | |
| 4,418,000 | | |
|
Selling and marketing | |
| 14,019,000 | | |
| 31,653,000 | | |
|
General and administrative | |
| 35,245,000 | | |
| 68,200,000 | | |
|
Impairment of property and equipment | |
| 19,446,000 | | |
| 26,445,000 | | |
|
Impairment of goodwill and intangible assets | |
| 1,500,000 | | |
| 42,880,000 | | |
|
Impairment of mined crypto assets | |
| - | | |
| 489,000 | | |
|
Total operating expenses | |
| 81,221,000 | | |
| 174,085,000 | | |
|
Loss from operations | |
| (57,004,000 | ) | |
| (149,301,000 | ) | |
|
Other income (expense): | |
| | | |
| | | |
|
Interest and other income | |
| 2,236,000 | | |
| 4,444,000 | | |
|
Interest expense | |
| (19,671,000 | ) | |
| (44,314,000 | ) | |
|
Other expense, guarantee | |
| - | | |
| (35,400,000 | ) | |
|
Gain on conversion of investment in equity securities to marketable equity securities | |
| 17,900,000 | | |
| - | | |
|
Gain (loss) on extinguishment of debt | |
| 2,981,000 | | |
| (7,322,000 | ) | |
|
Loss on extinguishment of debt, related party | |
| - | | |
| (4,164,000 | ) | |
|
Loss from investment in unconsolidated entity | |
| (1,958,000 | ) | |
| (302,000 | ) | |
|
Loss on deconsolidation of subsidiary | |
| - | | |
| (3,040,000 | ) | |
|
Impairment of equity securities | |
| (6,266,000 | ) | |
| (9,555,000 | ) | |
|
Change in fair value of warrant liability | |
| - | | |
| 6,319,000 | | |
|
Gain on the sale of fixed assets | |
| 79,000 | | |
| 2,069,000 | | |
|
Total other expense, net | |
| (4,699,000 | ) | |
| (91,265,000 | ) | |
|
Loss before income taxes | |
| (61,703,000 | ) | |
| (240,566,000 | ) | |
|
Income tax provision | |
| 56,000 | | |
| 348,000 | | |
|
Net loss from continuing operations | |
| (61,759,000 | ) | |
| (240,914,000 | ) | |
|
Net loss from discontinued operations | |
| (779,000 | ) | |
| (12,355,000 | ) | |
|
Net loss | |
| (62,538,000 | ) | |
| (253,269,000 | ) | |
|
Net loss attributable to non-controlling interest | |
| 6,334,000 | | |
| 22,242,000 | | |
|
Net loss attributable to Hyperscale Data, Inc. | |
| (56,204,000 | ) | |
| (231,027,000 | ) | |
|
Preferred dividends | |
| (5,277,000 | ) | |
| (1,375,000 | ) | |
|
Net loss available to common stockholders | |
$ | (61,481,000 | ) | |
$ | (232,402,000 | ) | |
|
| |
| | | |
| | | |
|
Basic and diluted net loss per common share: | |
| | | |
| | | |
|
Continuing operations | |
$ | (67.23 | ) | |
$ | (2,075.91 | ) | |
|
Discontinued operations | |
| (0.86 | ) | |
| (116.56 | ) | |
|
Net loss per common share | |
$ | (68.09 | ) | |
$ | (2,192.47 | ) | |
|
| |
| | | |
| | | |
|
Weighted average basic and diluted common shares outstanding | |
| 903,000 | | |
| 106,000 | | |
|
| |
| | | |
| | | |
|
Comprehensive loss | |
| | | |
| | | |
|
Net loss available to common stockholders | |
$ | (61,481,000 | ) | |
$ | (232,402,000 | ) | |
|
Foreign currency translation adjustment | |
| (66,000 | ) | |
| (698,000 | ) | |
|
Other comprehensive loss | |
| (66,000 | ) | |
| (698,000 | ) | |
|
Total comprehensive loss | |
$ | (61,547,000 | ) | |
$ | (233,100,000 | ) | |
The accompanying notes are an integral part of these consolidated
financial statements.
| | F-6 | | |
| | |
**HYPERSCALE DATA, INC. AND SUBSIDIARIES**
**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY**
|
| |
| | | |
| | | |
| | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | | |
|
| |
Preferred Stock | |
Class A | |
Class B | |
| |
| |
Accumulated | |
| |
| |
| | |
|
| |
Series A | | |
Series C | |
Series D | |
Series E | |
Series F | |
Common Stock | |
Common Stock | |
Additional | |
| |
Other | |
| |
| |
Total | | |
|
| |
Shares | | |
Par Amount | | |
Shares | | |
Par Amount | |
Shares | |
Par Amount | |
Shares | |
Par Amount | |
Shares | |
Par Amount | |
Shares | |
Amount | |
Shares | |
Amount | |
Paid-In
Capital | |
Accumulated
Deficit | |
Comprehensive
Loss | |
Non-Controlling
Interest | |
Treasury
Stock | |
Stockholders
Equity | | |
|
BALANCES, January 1, 2024 | |
| 7,040 | | |
$ | - | | - |
| 41,500 | | |
$ | - | |
| 425,197 | |
$ | - | |
| - | |
$ | - | |
| - | |
$ | - | |
| 127,322 | |
$ | - | |
| - | |
$ | - | |
$ | 644,856,000 | |
$ | (567,469,000 | ) |
$ | (2,097,000 | ) |
$ | 11,957,000 | |
$ | (30,571,000 | ) |
$ | 56,676,000 | | |
|
Issuance of Series C preferred stock, related party for cash | |
| - | | |
| - | | |
| 8,500 | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 8,123,000 | |
| - | |
| - | |
| - | |
| - | |
| 8,123,000 | | |
|
Fair value of warrants issued in connection with Series C preferred stock, related party | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 377,000 | |
| - | |
| - | |
| - | |
| - | |
| 377,000 | | |
|
Class B common stock dividend | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 4,998,597 | |
| 5,000 | |
| (5,000 | ) |
| - | |
| - | |
| - | |
| - | |
| - | | |
|
Series E preferred stock dividend | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| 649,998 | |
| 1,000 | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (1,000 | ) |
| - | |
| - | |
| - | |
| - | |
| - | | |
|
Series F preferred stock dividend | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 998,577 | |
| 1,000 | |
| - | |
| - | |
| - | |
| - | |
| (1,000 | ) |
| - | |
| - | |
| - | |
| - | |
| - | | |
|
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 1,505,000 | |
| - | |
| - | |
| - | |
| - | |
| 1,505,000 | | |
|
Issuance of Class A common stock for cash | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 731,686 | |
| 1,000 | |
| - | |
| - | |
| 14,597,000 | |
| - | |
| - | |
| - | |
| - | |
| 14,598,000 | | |
|
Financing cost in connection with sales of Class A common stock | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (513,000 | ) |
| - | |
| - | |
| - | |
| - | |
| (513,000 | ) | |
|
Issuance of Class A common stock for conversion of debt | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 400,885 | |
| - | |
| - | |
| - | |
| 4,779,000 | |
| - | |
| - | |
| - | |
| - | |
| 4,779,000 | | |
|
Increase in ownership interest of subsidiary | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (893,000 | ) |
| - | |
| (893,000 | ) | |
|
Sale of subsidiary stock to non-controlling interests | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 1,898,000 | |
| - | |
| 1,898,000 | | |
|
Financing cost in connection with sale of subsidiary stock to non-controlling interests | |
| | | |
| | | |
| | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| (2,600,000 | ) |
| | |
| (2,600,000 | ) | |
|
Conversion of RiskOn International, Inc. (ROI) convertible note | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 863,000 | |
| - | |
| 863,000 | | |
|
Net loss attributable to Hyperscale Data, Inc. | |
| - | | |
| - | | - |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (56,204,000 | ) |
| - | |
| - | |
| - | |
| (56,204,000 | ) | |
|
Series A preferred dividends ($1.88 per share) | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (18,000 | ) |
| - | |
| - | |
| - | |
| (18,000 | ) | |
|
Series C preferred dividends ($71.22 per share) | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (4,207,000 | ) |
| - | |
| - | |
| - | |
| (4,207,000 | ) | |
|
Series D preferred dividends ($2.44 per share) | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (1,052,000 | ) |
| - | |
| - | |
| - | |
| (1,052,000 | ) | |
|
Foreign currency translation adjustments | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (66,000 | ) |
| - | |
| - | |
| (66,000 | ) | |
|
Net loss attributable to non-controlling interest | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (6,334,000 | ) |
| - | |
| (6,334,000 | ) | |
|
Distribution of securities of TurnOnGreen, Inc. (TurnOnGreen) to Hyperscale Data Class A common stockholders ($5.70 per share) | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (4,900,000 | ) |
| - | |
| - | |
| 4,900,000 | |
| - | |
| - | | |
|
Distribution of ROI investment in White River Holdings Corp. (White River) to ROI stockholders | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (19,210,000 | ) |
| - | |
| (19,210,000 | ) | |
|
Net loss attributable to non-controlling interest of deconsolidated subsidiary | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (1,555,000 | ) |
| - | |
| (1,555,000 | ) | |
|
Deconsolidation of subsidiary | |
| - | | |
| - | | |
| - | | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 1,495,000 | |
| 4,428,000 | |
| - | |
| 5,923,000 | | |
|
Other | |
| - | | |
| - | | |
| - | | |
| - | |
| (101,362 | ) |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | | |
|
BALANCES, December 31, 2024 | |
| 7,040 | | |
$ | - | | - |
| 50,000 | | |
$ | - | |
| 323,835 | |
$ | - | |
| 649,998 | |
$ | 1,000 | |
| 998,577 | |
$ | 1,000 | |
| 1,259,893 | |
$ | 1,000 | |
| 4,998,597 | |
$ | 5,000 | |
$ | 668,817,000 | |
$ | (628,950,000 | ) |
$ | (668,000 | ) |
$ | (6,546,000 | ) |
$ | (30,571,000 | ) |
$ | 2,090,000 | | |
The accompanying notes are an integral part of these consolidated
financial statements. ****
| | F-7 | | |
| | |
**HYPERSCALE DATA, INC. AND SUBSIDIARIES**
**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY**
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Accumulated | | |
| | |
| | |
| | |
|
| |
Preferred Stock | | |
| | |
| | |
Additional | | |
| | |
Other | | |
| | |
| | |
Total | | |
|
| |
Series A | | |
Series B | | |
Series C | | |
Series D | | |
Class A Common Stock | | |
Paid-In | | |
Accumulated | | |
Comprehensive | | |
Non-Controlling | | |
Treasury | | |
Stockholders | | |
|
| |
Shares | | |
Par Amount | | |
Shares | | |
Par Amount | | |
Shares | | |
Par Amount | | |
Shares | | |
Par Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Loss | | |
Interest | | |
Stock | | |
Equity | | |
|
BALANCES, January 1, 2023 | |
| 7,040 | | |
$ | - | | |
| 125,000 | | |
$ | - | | |
| - | | |
$ | - | | |
| 172,838 | | |
$ | - | | |
| 1,456 | | |
$ | - | | |
$ | 565,905,000 | | |
$ | (329,078,000 | ) | |
$ | (1,100,000 | ) | |
$ | 17,496,000 | | |
$ | (29,235,000 | ) | |
$ | 223,988,000 | | |
|
Issuance of Class A common stock for restricted stock awards | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 6 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
|
Issuance of Series C preferred stock, related party | |
| - | | |
| - | | |
| - | | |
| - | | |
| 41,500 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 27,042,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 27,042,000 | | |
|
Fair value of warrants issued in connection with Series C preferred stock, related party | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 10,958,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 10,958,000 | | |
|
Series C preferred stock issuance costs | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (500,000 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (500,000 | ) | |
|
Issuance of Series D preferred stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 252,359 | | |
| - | | |
| - | | |
| - | | |
| 2,982,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 2,982,000 | | |
|
Series D preferred stock offering costs | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (105,000 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (105,000 | ) | |
|
Series B preferred stock exchanged for convertible note, related party | |
| - | | |
| - | | |
| (125,000 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,190,000 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,190,000 | ) | |
|
Stock-based compensation | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| - | | |
| | | |
| 6,615,000 | | |
| - | | |
| - | | |
| 4,253,000 | | |
| - | | |
| 10,868,000 | | |
|
Issuance of Class A common stock for cash | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 124,010 | | |
| - | | |
| 39,415,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 39,415,000 | | |
|
Financing cost in connection with sales of Class A common stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,344,000 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,344,000 | ) | |
|
Issuance of Class A common stock for conversion of preferred stock liabilities | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 164 | | |
| - | | |
| 912,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 912,000 | | |
|
Issuance of Class A common stock for conversion of debt | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 2,418 | | |
| - | | |
| 527,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 527,000 | | |
|
Class A common stock issued in connection with issuance of notes payable | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 45 | | |
| - | | |
| 162,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 162,000 | | |
|
Warrants issued in connection with issuance of convertible notes payable, related party | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 4,164,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 4,164,000 | | |
|
Remeasurement of Ault Disruptive subsidiary temporary equity | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (5,990,000 | ) | |
| - | | |
| - | | |
| - | | |
| (5,990,000 | ) | |
|
Increase in ownership interest of subsidiary | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 13,000 | | |
| - | | |
| - | | |
| (1,086,000 | ) | |
| - | | |
| (1,073,000 | ) | |
|
Non-controlling interest in ROI subsidiary acquired | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 6,357,000 | | |
| - | | |
| 6,357,000 | | |
|
Non-controlling interest in Eco Pack Technologies Limited (Eco Pack) subsidiary acquired | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 856,000 | | |
| - | | |
| 856,000 | | |
|
Sale of subsidiary stock to non-controlling interests | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 7,342,000 | | |
| - | | |
| 7,342,000 | | |
|
Distribution to Circle 8 Crane Services, LLC (Circle 8) non-controlling interest | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (729,000 | ) | |
| - | | |
| (729,000 | ) | |
|
Deconsolidation of Algorhythm Holdings, Inc. (f/k/a The Singing Machine Company) (SMC) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (7,966,000 | ) | |
| - | | |
| (7,966,000 | ) | |
|
Purchase of treasury stock - Ault Alpha LP (Ault Alpha) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,336,000 | ) | |
| (1,336,000 | ) | |
|
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (231,026,000 | ) | |
| - | | |
| - | | |
| - | | |
| (231,026,000 | ) | |
|
Series A preferred dividends ($2.50 per share) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (18,000 | ) | |
| | | |
| | | |
| | | |
| (18,000 | ) | |
|
Series D preferred dividends ($3.25 per share) | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,107,000 | ) | |
| - | | |
| - | | |
| - | | |
| (1,107,000 | ) | |
|
Foreign currency translation adjustments | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (997,000 | ) | |
| - | | |
| - | | |
| (997,000 | ) | |
|
Net loss attributable to non-controlling interest | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (25,268,000 | ) | |
| - | | |
| (25,268,000 | ) | |
|
Distribution of securities of TurnOnGreen to Hyperscale Data Class A common stockholders ($1,770 per share) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (10,700,000 | ) | |
| - | | |
| - | | |
| 10,700,000 | | |
| - | | |
| - | | |
|
Other | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (777 | ) | |
| - | | |
| - | | |
| (250,000 | ) | |
| - | | |
| 2,000 | | |
| - | | |
| (248,000 | ) | |
|
BALANCES, December 31, 2023 | |
| 7,040 | | |
$ | - | | |
| - | | |
$ | - | | |
| 41,500 | | |
$ | - | | |
| 425,197 | | |
$ | - | | |
| 127,322 | | |
$ | - | | |
$ | 644,856,000 | | |
$ | (567,469,000 | ) | |
$ | (2,097,000 | ) | |
$ | 11,957,000 | | |
$ | (30,571,000 | ) | |
$ | 56,676,000 | | |
The accompanying notes are an integral part of these consolidated
financial statements.
| | F-8 | | |
| | |
**HYPERSCALE DATA, INC. AND SUBSIDIARIES**
**CONSOLIDATED STATEMENTS OF CASH FLOWS**
|
| |
| | | |
| | | |
|
| |
For the Year Ended December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Cash flows from operating activities: | |
| | |
| | |
|
Net loss | |
$ | (62,538,000 | ) | |
$ | (253,269,000 | ) | |
|
Net loss from discontinued operations | |
| (779,000 | ) | |
| (12,355,000 | ) | |
|
Net loss from continuing operations | |
| (61,759,000 | ) | |
| (240,914,000 | ) | |
|
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | | |
|
Depreciation and amortization | |
| 24,437,000 | | |
| 27,952,000 | | |
|
Amortization of debt discount | |
| 7,773,000 | | |
| 21,899,000 | | |
|
Amortization of right-of-use assets | |
| 1,743,000 | | |
| 1,878,000 | | |
|
Other expense, guarantee | |
| - | | |
| 35,400,000 | | |
|
Impairment of goodwill and intangible assets | |
| 1,500,000 | | |
| 42,880,000 | | |
|
Stock-based compensation | |
| 3,256,000 | | |
| 9,069,000 | | |
|
Gain on the sale of fixed assets | |
| (79,000 | ) | |
| (2,069,000 | ) | |
|
Impairment of property and equipment | |
| 19,446,000 | | |
| 26,445,000 | | |
|
Impairment of equity securities | |
| 8,616,000 | | |
| 15,755,000 | | |
|
Impairment of crypto assets | |
| - | | |
| 489,000 | | |
|
Realized gains on the sale of crypto assets | |
| (684,000 | ) | |
| (520,000 | ) | |
|
Change in fair value of crypto assets | |
| (29,000 | ) | |
| - | | |
|
Revenue, crypto assets mining | |
| (24,960,000 | ) | |
| (33,107,000 | ) | |
|
Proceeds from the sale of crypto assets | |
| 25,350,000 | | |
| 29,111,000 | | |
|
Realized gains on sale of marketable securities | |
| (8,173,000 | ) | |
| (8,437,000 | ) | |
|
Gain on conversion of investment in equity securities to marketable equity securities | |
| (17,900,000 | ) | |
| - | | |
|
Unrealized losses (gains) on marketable securities | |
| 418,000 | | |
| (2,509,000 | ) | |
|
Realized losses on non-marketable equity securities | |
| 5,083,000 | | |
| - | | |
|
Unrealized losses on investments in common stock, related parties | |
| 598,000 | | |
| 5,785,000 | | |
|
Income from cash held in trust | |
| (41,000 | ) | |
| (2,590,000 | ) | |
|
Loss from investment in unconsolidated entity | |
| 1,957,000 | | |
| 302,000 | | |
|
Gain from reversal of deferred underwriting commissions of Ault Disruptive subsidiary | |
| (3,450,000 | ) | |
| - | | |
|
(Benefit) provision for loan losses | |
| (1,205,000 | ) | |
| 1,180,000 | | |
|
Change in the fair value of warrant liability | |
| - | | |
| (4,544,000 | ) | |
|
(Gain) loss on extinguishment of debt | |
| (2,981,000 | ) | |
| 12,883,000 | | |
|
Loss on deconsolidation of subsidiary | |
| - | | |
| 3,040,000 | | |
|
Other | |
| (2,721,000 | ) | |
| (1,173,000 | ) | |
|
Changes in operating assets and liabilities: | |
| | | |
| - | | |
|
Marketable equity securities | |
| 11,457,000 | | |
| 46,457,000 | | |
|
Accounts receivable | |
| 316,000 | | |
| (1,555,000 | ) | |
|
Inventories | |
| (36,000 | ) | |
| 2,517,000 | | |
|
Prepaid expenses and other current assets | |
| 948,000 | | |
| 4,277,000 | | |
|
Other assets | |
| (2,609,000 | ) | |
| (3,232,000 | ) | |
|
Accounts payable and accrued expenses | |
| 2,409,000 | | |
| 15,566,000 | | |
|
Lease liabilities | |
| (1,725,000 | ) | |
| (2,075,000 | ) | |
|
Net cash (used in) provided by operating activities from continuing operations | |
| (13,045,000 | ) | |
| 160,000 | | |
|
Net cash used in operating activities from discontinued operations | |
| (6,366,000 | ) | |
| (5,588,000 | ) | |
|
Net cash used in operating activities | |
| (19,411,000 | ) | |
| (5,428,000 | ) | |
|
Cash flows from investing activities: | |
| | | |
| | | |
|
Purchase of property and equipment | |
| (4,828,000 | ) | |
| (14,742,000 | ) | |
|
Cash decrease upon deconsolidation of subsidiary | |
| - | | |
| (6,285,000 | ) | |
|
Acquisition of non-controlling interests | |
| - | | |
| (1,072,000 | ) | |
|
Investments in loans receivable | |
| (1,034,000 | ) | |
| (501,000 | ) | |
|
Investments in non-marketable equity securities | |
| - | | |
| (10,952,000 | ) | |
|
Proceeds from the sale of fixed assets | |
| 12,957,000 | | |
| 4,515,000 | | |
|
Investment in notes receivable, related party | |
| - | | |
| (3,934,000 | ) | |
|
Other | |
| (109,000 | ) | |
| (210,000 | ) | |
|
Net cash provided by (used in) investing activities from continuing operations | |
| 6,986,000 | | |
| (33,181,000 | ) | |
|
Net cash (used in) provided by investing activities from discontinued operations | |
| (3,799,000 | ) | |
| 3,663,000 | | |
|
Net cash provided by (used in) investing activities | |
| 3,187,000 | | |
| (29,518,000 | ) | |
The accompanying notes are an integral part of these consolidated
financial statements.
| | F-9 | | |
| | |
**HYPERSCALE DATA, INC. AND SUBSIDIARIES**
**CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)**
|
| |
For the Year Ended December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Cash flows from financing activities: | |
| | |
| | |
|
Gross proceeds from sales of Class A common stock | |
$ | 14,598,000 | | |
$ | 39,415,000 | | |
|
Financing cost in connection with sales of Class A common stock | |
| (513,000 | ) | |
| (1,344,000 | ) | |
|
Proceeds from sales of Series D preferred stock | |
| - | | |
| 2,983,000 | | |
|
Financing cost in connection with sales of Series D preferred stock | |
| - | | |
| (105,000 | ) | |
|
Proceeds from sales of Series C preferred stock and warrants, related party | |
| 8,500,000 | | |
| 3,841,000 | | |
|
Financing cost in connection with sales of Series C preferred stock, related party | |
| - | | |
| (500,000 | ) | |
|
Proceeds from subsidiaries sale of stock to non-controlling interests | |
| 1,898,000 | | |
| 7,342,000 | | |
|
Distribution to Circle 8 non-controlling interest | |
| - | | |
| (729,000 | ) | |
|
Proceeds from notes payable | |
| 60,948,000 | | |
| 91,461,000 | | |
|
Proceeds from convertible notes payable, related party | |
| - | | |
| 4,625,000 | | |
|
Proceeds from notes payable, related party | |
| - | | |
| 2,337,000 | | |
|
Repayment of margin accounts | |
| - | | |
| (767,000 | ) | |
|
Payments on notes payable | |
| (60,172,000 | ) | |
| (116,349,000 | ) | |
|
Payments on convertible notes payable, related party | |
| (243,000 | ) | |
| (150,000 | ) | |
|
Payments on notes payable, related party | |
| (1,864,000 | ) | |
| (314,000 | ) | |
|
Payments of preferred dividends | |
| (5,277,000 | ) | |
| (1,375,000 | ) | |
|
Purchase of treasury stock | |
| - | | |
| (1,336,000 | ) | |
|
Proceeds from sales of convertible notes | |
| 6,700,000 | | |
| 5,165,000 | | |
|
Payments on convertible notes | |
| (1,280,000 | ) | |
| (1,022,000 | ) | |
|
Net cash provided by financing activities from continuing operations | |
| 23,295,000 | | |
| 33,178,000 | | |
|
Net cash provided by financing activities from discontinued operations | |
| 2,552,000 | | |
| 3,858,000 | | |
|
Net cash provided by financing activities | |
| 25,847,000 | | |
| 37,036,000 | | |
|
| |
| | | |
| | | |
|
Effect of exchange rate changes on cash and cash equivalents from continuing operations | |
| 30,000 | | |
| (776,000 | ) | |
|
| |
| | | |
| | | |
|
Net increase in cash and cash equivalents and restricted cash | |
| 9,653,000 | | |
| 1,314,000 | | |
|
| |
| | | |
| | | |
|
Cash and cash equivalents and restricted cash at beginning of period - continuing operations | |
| 11,068,000 | | |
| 11,860,000 | | |
|
Cash and cash equivalents and restricted cash at beginning of period - discontinued operations | |
| 4,301,000 | | |
| 2,195,000 | | |
|
Cash and cash equivalents and restricted cash at beginning of period | |
| 15,369,000 | | |
| 14,055,000 | | |
|
| |
| | | |
| | | |
|
Cash and cash equivalents and restricted cash at end of period | |
| 25,022,000 | | |
| 15,369,000 | | |
|
Less cash and cash equivalents and restricted cash of discontinued operations at end of period | |
| - | | |
| (4,301,000 | ) | |
|
Cash and cash equivalents and restricted cash of continued operations at end of period | |
$ | 25,022,000 | | |
$ | 11,068,000 | | |
|
| |
| | | |
| | | |
|
Supplemental disclosures of cash flow information: | |
| | | |
| | | |
|
Cash paid during the period for interest - continuing operations | |
$ | 10,721,000 | | |
$ | 3,966,000 | | |
|
Cash paid during the period for interest - discontinued operations | |
$ | - | | |
$ | 778,000 | | |
|
| |
| | | |
| | | |
|
Non-cash investing and financing activities: | |
| | | |
| | | |
|
Settlement of accounts payable with crypto assets | |
$ | 39,000 | | |
$ | 28,000 | | |
|
Settlement of interest payable with crypto assets | |
$ | 142,000 | | |
$ | - | | |
|
Settlement of note payable with crypto assets | |
$ | 506,000 | | |
$ | - | | |
|
Offset of fees receivable against note payable | |
$ | 2,200,000 | | |
$ | - | | |
|
Conversion of convertible notes payable into shares of Class A common stock | |
$ | 4,780,000 | | |
$ | - | | |
|
Conversion of convertible notes payable, related party into shares of Class A common stock | |
$ | - | | |
$ | 400,000 | | |
|
Conversion of debt and equity securities to marketable securities | |
$ | 4,996,000 | | |
$ | 23,703,000 | | |
|
Conversion of loans receivable to marketable securities | |
$ | - | | |
$ | 5,430,000 | | |
|
Exchange of related party advances for investment in other equity securities, related party | |
$ | 2,000,000 | | |
$ | - | | |
|
Recognition of new operating lease right-of-use assets and lease liabilities | |
$ | 2,080,000 | | |
$ | 4,372,000 | | |
|
Remeasurement of Ault Disruptive temporary equity | |
$ | - | | |
$ | 5,990,000 | | |
|
Preferred stock exchanged for notes payable | |
$ | - | | |
$ | 9,224,000 | | |
|
Notes payable exchanged for convertible notes payable | |
$ | - | | |
$ | - | | |
|
Notes payable exchanged for notes payable, related party | |
$ | - | | |
$ | 11,645,000 | | |
|
Dividend of ROI investment in White River to ROI shareholders | |
$ | 19,210,000 | | |
$ | - | | |
|
Redeemable non-controlling interests in equity of subsidiaries paid with cash and marketable securities held in trust account | |
$ | 2,225,000 | | |
$ | 120,064,000 | | |
|
Dividend paid in TurnOnGreen common stock in additional paid-in capital | |
$ | 4,900,000 | | |
$ | 10,700,000 | | |
|
Exchange of notes payable for preferred stock liabilities | |
$ | - | | |
$ | 8,437,000 | | |
|
Exchange of notes payable for preferred stock, related party | |
$ | - | | |
$ | 20,194,000 | | |
|
Exchange of convertible notes payable for preferred stock, related party | |
$ | - | | |
$ | 17,370,000 | | |
|
Exchange of preferred stock for convertible notes payable, related party | |
$ | - | | |
$ | 1,250,000 | | |
|
Accrued ROI commitment shares payable to non-controlling interests | |
$ | 2,600,000 | | |
$ | - | | |
The accompanying notes are an integral part of these consolidated
financial statements.
| | F-10 | | |
| | |
|
HYPERSCALE DATA, INC. AND SUBSIDIARIES | |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
|
DECEMBER 31, 2024 | |
|
| |
**1. DESCRIPTION OF BUSINESS**
Hyperscale Data, Inc. (f/k/a Ault Alliance,
Inc.), a Delaware corporation (Hyperscale Data or the Company) is a diversified holding company pursuing growth
by acquiring and developing undervalued businesses and disruptive technologies with a global impact. Through its wholly- and majority-owned
subsidiaries and strategic investments, the Company owns and/or operates data centers at which it mines Bitcoin and offers colocation
and hosting services for the emerging artificial intelligence (AI) ecosystems and other industries, and provides products
and services that support a diverse range of industries, including crane rental services, hotel operations, defense, industrial, an AI
software platform and a social gaming platform. In addition, the Company extends credit to select entrepreneurial businesses through a
licensed lending subsidiary.
The Company has the following reportable
segments:
|
| Energy and Infrastructure (Energy) crane operations; | |
|
| Technology and Finance (Fintech) commercial lending, activist investing, and stock
trading; | |
|
| Sentinum, Inc. (Sentinum) crypto assets mining operations and colocation and hosting
services for the emerging artificial intelligence ecosystems and other industries; | |
|
| TurnOnGreen commercial electronics solutions; | |
|
| ROI AI software platform and a social gaming platform; and | |
|
| Ault Global Real Estate Equities, Inc. (AGREE) hotel operations and other commercial
real estate holdings. | |
The Company had changes to its reportable segments due to the discontinued
operations of its majority-owned subsidiary, Gresham
Worldwide, Inc. (GIGA), and the deconsolidation of its previously consolidated variable interest entity, SMC. See Note 4
and Note 15 below.
On September 10, 2024, the Company changed
its name from Ault Alliance, Inc. to Hyperscale Data, Inc. and its Class A common stock ticker symbol was changed to GPUS.
The name change did not affect the rights of security holders of the Company.
**Reverse Stock Splits**
All share amounts in these financial statements
have been updated to reflect a 1-for-25 reverse stock split and a 1-for-35 reverse stock split, effective January 16, 2024 and November
22, 2024, respectively. The reverse stock splits did not affect the number of authorized shares of Class A common stock, preferred stock
or their respective par value per share.
**2. LIQUIDITY, GOING CONCERN AND MANAGEMENTS PLANS**
As of December 31, 2024, the Company had
cash and cash equivalents of $4.5 million (excluding restricted cash of $20.5million), negative working capital of $157.1million
and a history of net operating losses. The Company has financed its operations principally through issuances of convertible debt, promissory
notes and equity securities. These factors create substantial doubt about the Companys ability to continue as a going concern for
at least one year after the date that these consolidated financial statements are issued.
The consolidated financial statements do
not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the consolidated
financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the
realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
In making this assessment management performed
a comprehensive analysis of the Companys current circumstances, including its financial position, cash flow and cash usage forecasts,
as well as obligations and debts. Although management has a long history of successful capital raises, the analysis used to determine
the Companys ability as a going concern does not include cash sources beyond the Companys direct control that management
expects to be available within the next 12 months.
| | F-11 | | |
| | |
Management expects that the Companys
existing cash and cash equivalents, accounts receivable and marketable securities as of December 31, 2024, will not be sufficient to enable
the Company to fund its anticipated level of operations through one year from the date these financial statements are issued. Management
anticipates raising additional capital through the private and public sales of the Companys equity or debt securities and selling
its marketable securities as well as crypto assets, or a combination thereof. Although management believes that such capital sources will
be available, there can be no assurances that financing will be available to the Company when needed in order to allow the Company to
continue its operations, or if available, on terms acceptable to the Company. If the Company does not raise sufficient capital in a timely
manner, among other things, the Company may be forced to scale back or cease its operations altogether.
**3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**
**Basis of Presentation**
The accompanying consolidated financial
statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP).
**Prior Period Revision - Statement of Cash Flows**
For the year ended December 31, 2024, the
Company disclosed the borrowings of lines of credit and repayments of lines of credit as separate line items within notes payable activity
of the financing activities section of the consolidated statement of cash flows. The Company has corrected these line items for the year
ended December 31, 2023 for comparability purposes.
**Principles of Consolidation**
The consolidated financial statements include
the accounts of Hyperscale Data and its wholly owned and majority-owned subsidiaries. The consolidated financial statements also include
the accounts of all entities that the Company controls as the primary beneficiary of a variable interest entity (VIE). All
intercompany accounts and transactions have been eliminated upon consolidation.
The accounting guidance requires an enterprise
to perform an analysis to determine whether the enterprises variable interest or interests give it a controlling financial interest
in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE; to eliminate
the solely quantitative approach previously required for determining the primary beneficiary of a VIE; to add an additional reconsideration
event for determining whether an entity is a VIE when any changes in facts and circumstances occur such that holders of the equity investment
at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that
most significantly impact the entitys economic performance; and to require enhanced disclosures that will provide readers of financial
statements with more transparent information about an enterprises involvement in a VIE.
**Variable Interest Entities**
For VIEs, the Company assesses whether it
is the primary beneficiary as prescribed by the accounting guidance on the consolidation of a VIE.
The Company evaluates its business relationships
with related parties to identify potential VIEs under Accounting Standards Codification (ASC) 810, *Consolidation*.
The Company consolidates VIEs of which the Company is considered to be the primary beneficiary. Entities are considered to be the primary
beneficiary if they have both of the following characteristics: (i) the power to direct the activities that, when taken together, most
significantly impact the VIEs performance; and (ii) the obligation to absorb losses and right to receive the returns from the VIE
that would be significant to the VIE. The Companys judgment with respect to its level of influence or control of an entity involves
the consideration of various factors including the form of its ownership interest, its representation in the entitys governance,
the size of its investment, estimates of future cash flows, its ability to participate in policy making decisions and the rights of the
other investors to participate in the decision making process and to replace the Company as manager and/or liquidate the joint venture,
if applicable.
| | F-12 | | |
| | |
**Revenue Recognition**
The Company recognizes revenue under ASC
606, *Revenue from Contracts with Customers*(ASC 606). The core principle of ASC 606 is that a company should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
|
| Step 1: Identify the contract with the customer; | |
|
| Step 2: Identify the performance obligations in the contract; | |
|
| Step 3: Determine the transaction price; | |
|
| Step 4: Allocate the transaction price to the performance obligations
in the contract; and | |
|
| Step 5: Recognize revenue when the company satisfies a performance
obligation. | |
*Sales of Products*
The Company generates revenues from the
sale of its products through a direct and indirect sales force.The Companys performance obligations to deliver products are
satisfied at the point in time when title transfers to the customer. Generally, products are shipped FOB shipping point and title transfers
to the customer at the time the products are placed on a common carrier. The Company provides standard assurance warranties, which are
not separately priced, that the products function as intended. The Company primarily receives fixed consideration for sales of products.
Some of the Companys contracts with distributors include stock rotation rights after six months for slow-moving inventory, which
represents variable consideration. The Company uses an expected value method to estimate variable consideration and constrains revenue
for estimated stock rotations until it is probable that a significant reversal in the amount of cumulative revenue recognized will not
occur. To date, returns have been insignificant. The Companys customers generally pay within 30 days from the receipt of an invoice.
Because the Companys product sales
agreements have an expected duration of one year or less, the Company has elected to adopt the practical expedient in ASC 606-10-50-14(a)
of not disclosing information about its remaining performance obligations.
*Lending and Trading Activities*
Lending Activities
The Fintech segment, through Ault Lending, LLC (Ault
Lending), generates revenue from lending activities primarily through interest, origination fees and late/other fees. Interest
income on these products is calculated based on the contractual interest rate and recorded as interest income as earned. The origination
fees or original issue discounts (OIDs) are recognized over the life of the loan using the effective interest method.
Trading Activities
The Fintech segment, through Ault Lending, also generates
revenue from trading activities primarily through sales of securities and unrealized gains and losses from held securities. All investment
transactions are recorded on a trade date basis. Financial instruments utilized in trading activities are carried at fair value. For more
information on fair value, see Note 7. Fair Value of Financial Instruments. Trading-related revenue can be volatile and is largely driven
by general market conditions. Also, trading-related revenue is dependent on the volume and type of transactions, the level of risk assumed,
and the volatility of price and rate movements at any given time within the ever-changing market environment. Realized and unrealized
gains and losses are recognized in revenue from trading activities.
*Crypto Assets Mining*
The Company has entered into a crypto assets
mining pool by executing a contract with a mining pool operator to provide hash calculation services to the mining pool. The Companys
customer, as defined in ASC 606-10-20, is the mining pool operator with which the Company has agreed to the terms of service and user
service agreement. The Company supplies hash calculation services, in exchange for consideration, to the pool operator who in turn provides
transaction verification services to third parties via a mining pool that includes other participants. The Companys performance
obligation is the provision of hash calculation services to the pool operator and this performance obligation is an output of the Companys
ordinary activities for which it decides when to provide services under the contract.
The Companys enforceable right to
compensation begins only when, and lasts as long as, the Company provides hash calculation services to the mining pool operator and is
created as power is provided over time. The only consideration due to the Company relates to the provision of hash calculation services.
The contract with the pool operator provides both parties the unilateral enforceable right to terminate the contract at any time without
penalty. The customer termination option results in a contract that continuously renews throughout the day and therefore has a duration
of less than 24 hours. The implied renewal option is not a material right because there are no upfront or incremental fees in the initial
contract and the terms, conditions, and compensation amount for the renewal options are at the then market rates. Providing such hash
calculation services is the only performance obligation in the Companys contracts with mining pool operators.
| | F-13 | | |
| | |
The transaction consideration the Company
receives, if any, is non-cash consideration in the form of Bitcoin. Changes in the fair value of the non-cash consideration due to form
of the consideration (changes in the market price of Bitcoin) are not included in the transaction price and are therefore not included
in revenue. The mining pool operator charges fees to cover the costs of maintaining the pool and are deducted from amounts the Company
may otherwise earn and are treated as a reduction to the consideration earned. Fees fluctuate and historically have been approximately
0.3% per reward earned, on average.
The Company participated in mining pools
that used the full pay-per-share (FPPS) payout method for the year ended December 31, 2024. The Company is entitled to compensation
once it begins to perform hash calculations for the pool operator in accordance with the operators specifications over a 24-hour
period beginning midnight UTC and ending 23:59:59 UTC on a daily basis. The non-cash consideration that the Company is entitled to for
providing hash calculations to the pool operator under the FPPS payout method is made up of block rewards and transaction fees less pool
operator fees determined as follows:
|
| The non-cash consideration in the form of a block reward is based on the total blocks expected to be generated
on the Bitcoin network for the daily 24-hour period beginning midnight UTC and ending 23:59:59 UTC in accordance with the following formula:
the daily hash calculations that the Company provided to the pool operator as a percent of the Bitcoin networks implied hash calculations
as determined by the network difficulty, multiplied by the total Bitcoin network block rewards expected to be generated for the same daily
period. | |
|
| The non-cash consideration in the form of transaction fees paid by transaction requestors is based on
the share of standard transaction fees over the daily 24-hour period beginning midnight UTC and ending 23:59:59 UTC. The pool operator
calculates the standard transaction fee during the 24-hour period using a rolling 144 block moving average of actual transaction fees. | |
|
| The block reward and transaction fees earned by the Company are reduced by mining pool fees charged by
the operator for operating the pool based on a rate schedule per the mining pool contract. The mining pool fee is only incurred to the
extent the Company performs hash calculations and generates revenue in accordance with the pool operators payout formula during
the same 24-hour period beginning midnight UTC daily. | |
The contract is in effect until terminated
by either party.
All consideration pursuant to this arrangement
is variable. It is not probable that a significant reversal of cumulative revenue will occur. The Company is able to calculate the payout
based on the contractual formula, non-cash revenue is estimated and recognized based on the fair value of Bitcoin on the date of contract
inception. Fair value of the crypto assets consideration is determined using the midnight UTC spot price of the Companys principal
market for Bitcoin. The Company recognizes non-cash consideration on the same day that control of the contracted service is transferred
to the pool operator, which is the same day as the contract inception.
There is no significant financing component
in these transactions.
Expenses associated with running the crypto
assets mining business, such as equipment depreciation and electricity costs, are recorded as a component of cost of revenues.
*Hotel Operations*
The primary sources of revenue include room
and food and beverage revenue from the Companys hotels.
Rooms revenue represents revenue from the
occupancy of the Companys hotel rooms, which is driven by the occupancy and average daily rate charged. Rooms revenue includes
revenue from guest no-shows, daily use, and early/late departure fees. The contracts for room stays with customers are generally short
in duration and revenues are recognized as services are provided over the course of the hotel stay at the daily transaction price agreed
to under the contract.
Food and beverage revenue consists of revenue
from the restaurants and lounges, in room dining and mini bars, and banquet/catering revenue from group and social functions. Payment
of the transaction price is due immediately when the customer purchases the goods and services. Therefore, revenue is recognized at a
point in time when the physical possession has transferred to the customer.
| | F-14 | | |
| | |
*Crane Operations - Heavy Lifting and Pump Maintenance
Services*
The Company generates revenue by providing
heavy lifting and pump maintenance services to customers under various short-term agreements which may be hourly, daily, weekly or monthly.
Each service agreement generally has one performance obligation and includes a promise to complete the service at a specified location
and time and identifies the billing rate to be charged. Payment terms are identified in the terms of the contract and agreed to by both
parties for each promised service within the contract prior to the commencement or performance of said services. The collectability of
payment is considered probable based on managements history with the certain type and class of customers and their ability and
intention of payment. The customer simultaneously receives and consumes the benefits as the Company provides the hourly, daily, weekly
or monthly service.
**Cash and Cash Equivalents**
The Company considers all highly liquid
investments with a maturity of three months or less at the time of purchase to be cash equivalents. Financial instruments that potentially
subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Companys cash is maintained in
checking accounts, money market funds and certificates of deposits with reputable financial institutions. These balances exceed the United
States (U.S.) Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses on deposits
of cash and cash equivalents.
**Restricted Cash**
As of December 31, 2024, restricted
cash included $18.4 million related to the Companys guarantee obligations (see Note
29), $1.3 millionof cash collateral for notes payable and $0.8 million of cash held in trust related to environmental
contingencies related to the Michigan data center. As of December 31, 2023, restricted cash included $4.3 million of cash collateral
for notes payable and $0.7million of cash held in trust related to environmental
contingencies related to the Michigan data center.
Cash, cash equivalents and restricted
cash consisted of the following:
|
Schedule of cash equivalents and restricted cash | |
| | | |
| | | |
|
| |
December 31, | | |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Cash and cash equivalents | |
$ | 4,546,000 | | |
$ | 6,106,000 | | |
|
Restricted cash | |
| 20,476,000 | | |
| 4,962,000 | | |
|
Total cash, cash equivalents and restricted cash | |
$ | 25,022,000 | | |
$ | 11,068,000 | | |
**Cash and Marketable Securities Held in Trust Account**
As of December 31, 2023, the Company held
$2.2 million in cash and marketable securities in a trust account. Cash and marketable securities held in the trust account represented
cash and money market funds that primarily invested in U.S. treasury bills that were purchased with funds raised through the initial public
offering of Ault Disruptive, a consolidated special purpose acquisition company. The funds raised were held in a trust account that was
restricted for use and may only be used for purposes of completing an initial business combination or redemption of the common stock of
Ault Disruptive, as set forth in the trust agreement. The funds held in trust are included within Level 1 of the fair value hierarchy.
During the year ended December 31, 2024, all shares of Ault Disruptive common stock were redeemed with the cash and marketable securities
previously held in the trust account.
**Bitcoin**
Bitcoin awarded to the Company through its
mining activities are accounted for in connection with the Companys revenue recognition policy.
In accordance with Accounting Standards
Update (ASU) 2023-08, *Accounting for and Disclosure of Crypto Assets*, the Company measures Bitcoin at fair value
with changes recognized in operating expenses on the consolidated statements of operations. The Company tracks its cost basis of digital
assets by wallet in accordance with the first-in, first-out method of accounting.
Sales of Bitcoin by the Company and Bitcoin
awarded to the Company are included within cash flows from operating activities on the consolidated statements of cash flows. Realized
gains or losses from sales of Bitcoin are included in loss from operations on the consolidated statements of operations.
**Fair Value of Financial Instruments**
In accordance with ASC 820, *Fair Value
Measurements and Disclosures*, fair value is defined as the exit price, or the amount that would be received for the sale of an asset
or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.
| | F-15 | | |
| | |
The guidance also establishes a hierarchy
for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring
that the most observable inputs be used when available. Observable inputs include those that market participants would use in valuing
the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are
inputs that reflect the Companys assumptions about the factors that market participants would use in valuing the asset or liability.
The guidance establishes three levels of inputs that may be used to measure fair value:
|
| Level 1: Quoted market prices in active markets for identical
assets or liabilities. | |
|
| Level 2: Inputs other than Level 1 that are observable,
either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active;
or model-derived valuations. All significant inputs used in the Companys valuations are observable or can be derived principally
from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include
quoted prices that were adjusted for security-specific restrictions which are compared to output from internally developed models such
as a discounted cash flow model. | |
|
| Level 3: Unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the assets or liabilities. | |
The carrying amounts of financial instruments
carried at cost, including cash and cash equivalents, accounts receivables and accounts and other receivable related party, investments,
notes receivable, trade payables and trade payables related party approximate their fair value due to the short-term maturities
of such instruments.
The categorization of a financial instrument
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
*Equity Investments*
The Companys marketable equity securities
are publicly traded stocks or funds measured at fair value and classified within Level 1 and 2 in the fair value hierarchy because the
Company uses quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments
in active markets.
For investments where little or no public
market exists, managements determination of fair value is based on the best available information which may incorporate managements
own assumptions and involves a significant degree of judgment, taking into consideration various factors including earnings history, financial
condition, recent sales prices of the issuers securities and liquidity risks.
Other equity securities also include investments
in entities that do not have a readily determinable fair value and do not report net asset value per share. These investments are accounted
for using a measurement alternative under which they are measured at cost and adjusted for observable price changes and impairments. Observable
price changes result from, among other things, equity transactions for the same issuer executed during the reporting period, including
subsequent equity offerings or other reported equity transactions related to the same issuer. For these transactions to be considered
observable price changes of the same issuer, the Company evaluates whether these transactions have similar rights and obligations, including
voting rights, distribution preferences, conversion rights, and other factors, to the investments the Company holds. Any investments adjusted
to their fair value by applying the measurement alternative are disclosed as nonrecurring fair value measurements, including the level
in the fair value hierarchy that was used.
**Accounts Receivable and Allowance for Credit Losses**
The Companys receivables are recorded
when invoiced and represent claims against third parties that will be settled in cash. The Company records accounts receivable at the
invoiced amount less an allowance for any potentially uncollectible accounts under the current expected credit loss impairment model and
discloses the net amount of the financial instrument expected to be collected. The Company estimates the allowance for credit losses based
on an ongoing review of existing economic conditions, the financial conditions of the customers, historical trends in credit losses, and
the amount and age of past due accounts. Past-due receivable balances are written off when the Companys internal collection efforts
have been unsuccessful in collecting the amount due.
| | F-16 | | |
| | |
**Concentration of Credit Risk**
Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables.
Cash and cash equivalents are invested in
banks in the U.S. Such deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions.
Trade receivables of the Company and its
subsidiaries are mainly derived from sales to customers located primarily in the U.S. The Company performs ongoing credit evaluations
of its customers and to date has not experienced any material losses. An allowance for doubtful accounts is determined with respect to
those amounts that the Company and its subsidiaries have determined to be doubtful of collection.
**Inventories**
Inventories are stated at the lower of cost
or net realizable value. Inventory write-offs are provided to cover risks arising from slow-moving items or technological obsolescence.
Cost of inventories is determined as follows:
Raw materials, parts and supplies
- using the first-in, first-out method; and
Finished products - on the basis of direct manufacturing
costs with the addition of indirect manufacturing costs.
Inventories are stated at the lower of cost
(first-in, first-out method) or net realizable value. Inbound shipping and handling costs are classified as a component of cost of revenues
in the consolidated statements of operations. The Company reviews the components of its inventory and its inventory purchase commitments
on a regular basis for excess and obsolete inventory based on estimated future usage and sales. Write-downs in inventory value or losses
on inventory purchase commitments depend on various items, including factors related to customer demand, economic and competitive conditions,
technological advances or new product introductions by the Company or its customers that vary from its current expectations. Whenever
inventory is written down, a new cost basis is established and the inventory is not subsequently written up if market conditions improve.
**Property and Equipment, Net**
Property and equipment are stated at cost,
net of accumulated depreciation. Gains or losses on disposals of property and equipment are recorded within income from operations. Repairs
and maintenance costs are expensed as incurred. Significant improvements or betterments are capitalized and depreciated over the estimated
life of the asset. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, at the following
annual rates:
|
Schedule of estimated useful life of property, plant and equipment | |
| |
|
| |
Useful lives (in years) | |
|
| |
| |
|
Bitcoin mining equipment | |
1.5 | |
|
Computer, software and related equipment | |
3 5 | |
|
Office furniture and equipment | |
5 15 | |
|
Crane rental equipment | |
5 10 | |
|
Aircraft | |
7 | |
|
Vehicles | |
5 10 | |
|
Building and building improvements | |
7 39 | |
|
Leasehold improvements | |
Over the term of the lease or the life of the asset, whichever is shorter. | |
**Leases**
The Company accounts for its leases under
ASC 842, *Leases*. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases.
The Company only has operating leases. Operating leases are recognized as right-of-use assets, operating lease liability, current, and
operating lease liability, non-current on the Companys consolidated balance sheets. Lease assets and liabilities are recognized
based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Companys
leases do not provide an implicit rate, the Company uses the Companys incremental borrowing rate based on the information available
at commencement date in determining the present value of future payments. In certain of the Companys lease agreements, the Company
receives periods of reduced rent or free rent and other incentives. The Company recognizes lease costs on a straight-line basis over the
lease term without regard to deferred payment terms, such as rent holidays, that defer the commencement date of required payments. The
Companys lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise
that option. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life of
the lease, without assuming renewal features, if any, are exercised. The Company does not separate lease and non-lease components for
the Companys leases.
| | F-17 | | |
| | |
**Impairment of Long-Lived Assets**
Management reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted expected future cash flows
expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by comparing
the carrying amount of the assets to their fair value.
**Impairment of Debt Securities**
****
Debt securities are evaluated periodically
to determine whether a decline in their value is other than temporary. The Company utilizes criteria such as the magnitude and duration
of the decline, in addition to the reason underlying the decline, to determine whether the loss in value is other than temporary. The
term other than temporary is not intended to indicate that the decline is permanent. It indicates that the prospects for
a near-term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater
than, the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security
is reduced and a corresponding charge to earnings is recognized.
**Business Combination**
The Company allocates the purchase price
of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values
on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The
purchase price allocation process requires management to make significant estimates and assumptions at the acquisition date with respect
to intangible assets. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination
of fair values during the measurement period, which may be up to one year from the acquisition date. Direct transaction costs associated
with the business combination are expensed as incurred. The Company includes the results of operations of the business that it has acquired
in its consolidated results prospectively from the date of acquisition.
If the business combination is achieved
in stages, the acquisition date carrying value of the acquirers previously held equity interest in the acquirer is re-measured
to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.
**Intangible Assets**
The Company acquired amortizable intangibles
assets as part of asset purchase agreements consisting of customer relationships, trade names and proprietary technology.
The Company reviews intangible assets for
impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets might not be recoverable.
Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business
in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of
the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of
undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment
loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying
amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based
on discounted cash flows.
**Common Stock Purchase Warrants and Other Derivative Financial
Instruments**
The Company classifies common stock purchase
warrants and other free standing derivative financial instruments as equity if the contracts (i)require physical settlement or net-share
settlement or (ii)give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share
settlement). The Company classifies any contracts that (i)require net-cash settlement (including a requirement to net cash settle
the contract if an event occurs and if that event is outside the control of the Company), (ii)give the counterparty a choice of
net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii)contain reset provisions, as
either an asset or a liability. The Company assesses classification of its freestanding derivatives at each reporting date to determine
whether a change in classification between assets and liabilities is required. The Company determined that certain freestanding derivatives,
which principally consist of issuance of warrants to purchase shares of Class A common stock in connection with convertible notes and
to employees of the Company, satisfy the criteria for classification as equity instruments as these warrants do not contain cash settlement
features or variable settlement provisions that cause them to not be indexed to the Companys own stock.
| | F-18 | | |
| | |
**Fair Value Option**
The Company has elected to record the senior
secured convertible promissory notes, related party (Convertible Notes) at fair value on the date of issuance, with gains
and losses arising from changes in fair value recognized in the consolidated statements of operations at each period end while those are
outstanding. Issuance costs are recognized in the consolidated statement of operations in the period in which they are incurred. The Company
utilized a Monte-Carlo simulation at inception to value the Convertible Notes. The Monte-Carlo simulation is calculated as the average
present value over all simulated paths. The key inputs and assumptions used in the Monte-Carlo Simulation, including volatility, estimated
market yield, risk-free rate, the probability of various scenarios, including held to maturity and subsequent preferred stock offering
and various simulated paths.
The Company assesses the inputs used to
measure fair value using the three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the
market. For instruments where little or no public market exists, managements determination of fair value is based on the best available
information which may incorporate managements own assumptions and involves a significant degree of judgment, taking into consideration
various factors including earnings history, financial condition, recent sales prices of the issuers securities and liquidity risks.
**Convertible Instruments**
The Company accounts for hybrid contracts
that feature conversion options in accordance with ASC 815, *Derivatives and Hedging Activities* (ASC 815). ASC 815
requires companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial
instruments according to certain criteria. The criteria include circumstances in which (a)the economic characteristics and risks
of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract,
(b)the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair
value under otherwise applicable GAAP with changes in fair value reported in earnings as they occur and (c)a separate instrument
with the same terms as the embedded derivative instrument would be considered a derivative instrument.
Conversion options that contain variable
settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities
at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.
The Company accounts for convertible instruments,
when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, in accordance
with ASC 470-20, *Debt with Conversion and Other Options* (ASC 470-20). Under ASC 470-20, the Company records, when
necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences
between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price
embedded in the note. The Company accounts for convertible instruments (when the Company has determined that the embedded conversion options
should be bifurcated from their host instruments) in accordance with ASC 815.
**Debt Discounts**
The Company accounts for debt discount according
to ASC 470-20, *Debt with Conversion and Other Options*. Debt discounts are amortized through periodic charges to interest expense
over the term of the related financial instrument using the effective interest method.
**Guarantee Liability**
The Company maintains a guarantee liability
that represents its exposure related to guarantees associated with related party debt. The guarantee liability is reported in current
liabilities as a separate line item on the consolidated balance sheets, and the provision for guarantee liability is reported in other
income (expense) as a separate line item on the consolidated statement of operations. The guarantee liability represents managements
estimate of the Companys exposure to losses pursuant to the Companys related party guarantee obligations.
| | F-19 | | |
| | |
**Redeemable Non-Controlling Interests in Equity of Subsidiary**
The Company records redeemable non-controlling
interests in equity of subsidiaries to reflect the economic interests of the common stockholders in Ault Disruptive. These interests are
presented as redeemable non-controlling interests in equity of subsidiaries within the consolidated balance sheets, outside of the permanent
equity section. The common stockholders in Ault Disruptive have redemption rights that are considered to be outside of the Companys
control. As of December 31, 2023, the carrying amount of the redeemable non-controlling interest in equity of subsidiaries was recorded
at its redemption value of$2.2 million. During the year ended December 31, 2024, shares of Ault Disruptive common stock were redeemed
for an aggregate redemption amount of $2.3 million. Remeasurements to the redemption value of the redeemable non-controlling interest
in equity of subsidiaries are recorded within additional paid-in capital.
**Treasury Stock**
The Company records the aggregate purchase
price of treasury stock at cost and includes treasury stock as a reduction to stockholders equity.
**Stock-Based Compensation**
The Company accounts for stock-based compensation
in accordance with ASC 718, *Compensation Stock Compensation* (ASC 718).
The Company uses the Black-Scholes option
pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions
which determine the fair value of stock-based awards, including the options expected term and the price volatility of the underlying
stock.
Under ASC 718:
|
| the Company recognizes stock-based expenses related to stock option awards on a straight-line basis over
the requisite service period of the awards, which is generally the vesting term of two to four years; | |
|
| stock-based expenses are recognized net of forfeitures as they occur; | |
|
| the expected term assumption, using the simplified method, reflects the period for which the Company believes
the option will remain outstanding; | |
|
| the Company determined the volatility of its stock by looking at the historic volatility of its stock
over the expected term of the grant; and | |
|
| the risk-free rate reflects the U.S. Treasury yield for a similar expected term in effect at the time
of the grant. | |
**IncomeTaxes**
The Company determines its income taxes
under the asset and liability method in accordance with ASC 740,*Income Taxes*, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the fiscal year in which the differences are expected to reverse. Deferred tax assets
are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the Statements of Operations and Comprehensive Loss in the period that includes the enactment date.
The Company accounts for uncertain tax positions
in accordance with ASC 740-10-25, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under ASC 740-10-25, the Company may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based
on the technical merits of the position.The tax benefit to be recognized is measured as the largest amount of benefit that has a
greater than fifty percent likelihood of being realized upon ultimate settlement. To the extent that the final tax outcome of these matters
is different than the amount recorded, such differences impact income tax expense in the period in which such determination is made. Interest
and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. ASC 740-10-25also
requires management to evaluate tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions
that more likely than not would not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated
tax positions taken by the Company and has concluded that as of December 31, 2024 and 2023, there were no uncertain tax positions taken,
or expected to be taken, that would require recognition of a liability that would require disclosure in the financial statements.
| | F-20 | | |
| | |
**Foreign Currency Translation**
A substantial portion of the Companys
revenues are generated in U.S. dollars. In addition, a substantial portion of the Companys costs are incurred in U.S. dollars.
Company management has determined that the U.S. dollar is the functional currency of the primary economic environment in which it operates.
Accordingly, monetary accounts maintained
in currencies other than the U.S. dollar are re-measured into U.S. dollars in accordance with the Financial Accounting Standards Board
(FASB) ASC 830,*Foreign Currency Matters*(ASC 830). All transaction gains and losses from
the re-measurement of monetary balance sheet items are reflected in the statements of operations as financial income or expenses as appropriate.
The financial statements of certain foreign
subsidiaries, whose functional currency is not the U.S. dollar, have been translated into U.S. dollars in accordance with ASC 830. Balance
sheet accounts are translated using the exchange rates in effect as of the balance sheet date, while statement of operations amounts are
translated at the average exchange rate for the reporting period. The resulting translation adjustments are recognized as other comprehensive
loss in the consolidated statement of comprehensive loss and as accumulated comprehensive loss in the statement of changes in stockholders
equity.
**Comprehensive Loss**
The Company reports comprehensive loss in
accordance with ASC 220, *Comprehensive Income*. This statement establishes standards for the reporting and presentation of comprehensive
loss and its components in a full set of general purpose financial statements. Comprehensive loss generally represents all changes in
equity during the period except those resulting from investments by, or distributions to, stockholders. The Company determined that its
items of other comprehensive loss relate to changes in foreign currency translation adjustments and impairment of debt securities.
**Accounting Estimates**
The preparation of the consolidated financial
statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and reported amounts of revenue and expense during the reporting period.
Estimates are used when accounting for certain items such as valuation of securities, reserves for trade receivables and inventories,
intangible assets and goodwill, useful lives and the recoverability of long-lived assets, stock-based arrangements, contingent consideration,
and deferred income taxes and related valuation allowance. Estimates are based on historical experience, where applicable, and assumptions
that management believes are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results
may differ.
**Preferred Stock Liabilities**
The Company follows ASC 480-10, *Distinguishing
Liabilities from Equity*, in its evaluation of the accounting for preferred stock liabilities. ASC 480-10-25-14 requires liability
accounting for certain financial instruments, including shares that embody an unconditional obligation to transfer a variable number of
shares, provided that the monetary value of the obligation is based solely or predominantly on one of the following three characteristics:
|
| A fixed monetary amount known at inception; | |
|
| Variations in something other than the fair value of the issuers shares; or | |
|
| Variations in the fair value of the issuers equity shares, but the monetary value to the counterparty
moves in the opposite direction as the value of the issuers shares. | |
The number of shares delivered is determined
on the basis of (1) the fixed monetary amount determined as the stated value and (2) the current stock price at settlement, so that the
aggregate fair value of the shares delivered equals the monetary value of the obligation, which is fixed or predominantly fixed. Accordingly,
the holder is not significantly exposed to gains and losses attributable to changes in the fair value of the Companys equity shares.
Instead, the Company is using its own equity shares as currency to settle a monetary obligation.
**Discontinued Operations**
The Company records discontinued operations
when the disposal of a separately identified business unit constitutes a strategic shift in the Companys operations, as defined
in ASC Topic 205-20, Discontinued Operations (ASC Topic 205-20).
| | F-21 | | |
| | |
**Reclassifications**
Certain prior year amounts have been reclassified
for comparative purposes to conform to the current-year financial statement presentation. These reclassifications had no effect on previously
reported results of operations. The impact on any prior period disclosures was immaterial.
**Recent Accounting Pronouncements**
The Company continually assesses any new
accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement may affect the Companys
financial reporting, the Company undertakes an analysis to determine any required changes to its consolidated financial statements.
On December 14, 2023, the FASB issued ASU
No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09). ASU 2023-09 requires entities
to disclose specific rate reconciliations, amount of income taxes separated by federal and individual jurisdiction, and the amount of
income (loss) from continuing operations before income tax expense (benefit) disaggregated between federal, state, and foreign. The new
standard is effective for the Company for its fiscal year beginning January 1, 2025, with early adoption permitted. The Company is currently
evaluating the impact of adopting the standard.
On November 27, 2023, the FASB issued ASU
No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07). ASU 2023-07 is
designed to improve the reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses
that are regularly provided to the chief operating decision maker. The Company adopted ASU 2023-07 as required for the year ended December
31, 2024. The adoption required the Company to provide additional disclosures, but otherwise it does not materially impact the accompanying
financial statements.
In November 2024, the FASB issued ASU No.
2024-03,Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures(Subtopic 220-40): Disaggregation
of Income Statement Expenses (ASU 2024-03). ASU 2024-03 requires additional disclosures of certain expenses in the notes
of the financial statements, to provide enhanced transparency into the expense captions presented on the Consolidated Statements of Operations.
Additionally, in January 2025, the FASB issued ASU 2025-01,Income Statement - Reporting Comprehensive Income - Expense Disaggregation
Disclosures(Subtopic 220-40), to clarify the effective date of ASU 2024-03. The new standard is effective for the Company for its
annual periods beginning January 1, 2027 and for interim periods beginning January 1, 2028, with early adoption permitted. The Company
is currently evaluating the impact of adopting the standard.
**4.DECONSOLIDATION OF SUBSIDIARY AND DISCONTINUED OPERATIONS**
**Presentation of GIGA as Discontinued Operations**
On August 14, 2024, GIGA filed a petition
for reorganization under Chapter 11 of the bankruptcy laws. The filing placed GIGA under the control of the bankruptcy court, which oversees
its reorganization and restructuring process. The Company assessed the inherent uncertainties associated with the outcome of the Chapter
11 reorganization process and the anticipated duration thereof, and concluded that it was appropriate to deconsolidate GIGA and its subsidiaries
effective on the petition date. The Company recognized a gain on deconsolidation of GIGA of $2.0 million included in net gain (loss) from
discontinued operations.
In connection with the Chapter 11 reorganization
process, the Company concluded that the operations of GIGA met the criteria for discontinued operations as this strategic shift that will
have a significant effect on the Companys operations and financial results. As a result, the Company has presented the results
of operations, cash flows and financial position of GIGA as discontinued operations in the accompanying consolidated financial statements
and notes for all periods presented.
| | F-22 | | |
| | |
The following table presents the assets
and liabilities of GIGA operations:
|
Schedule of presents the assets and liabilities | |
| | | |
| | | |
|
| |
December 31, | | |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Cash and cash equivalents | |
$ | - | | |
$ | 3,601,000 | | |
|
Restricted cash | |
| - | | |
| 700,000 | | |
|
Accounts receivable | |
| - | | |
| 4,350,000 | | |
|
Inventories | |
| - | | |
| 6,643,000 | | |
|
Prepaid expenses and other current assets | |
| - | | |
| 4,859,000 | | |
|
Intangible assets, net | |
| - | | |
| 1,707,000 | | |
|
Goodwill | |
| - | | |
| 5,794,000 | | |
|
Property and equipment, net - current | |
| - | | |
| 1,690,000 | | |
|
Right-of-use assets | |
| - | | |
| 3,023,000 | | |
|
Total assets discontinued operations | |
| - | | |
| 32,367,000 | | |
|
Accounts payable and accrued expenses | |
| - | | |
| 14,005,000 | | |
|
Operating lease liability | |
| - | | |
| 3,098,000 | | |
|
Notes payable | |
| - | | |
| 1,174,000 | | |
|
Convertible notes payable | |
| - | | |
| 4,388,000 | | |
|
Liabilities discontinued operations | |
| - | | |
| 22,664,000 | | |
|
Net assets of discontinued operations | |
$ | - | | |
$ | 9,703,000 | | |
Net assets of discontinued operations excludes
$14.0 million of intercompany notes payable to Hyperscale Data and Ault Lending as of December 31, 2024.
The following table presents the results
of GIGA operations:
|
Schedule of operations | |
| | | |
| | | |
|
| |
For the Year Ended | | |
|
| |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Revenue, products | |
$ | 30,862,000 | | |
$ | 37,759,000 | | |
|
Cost of revenue, products | |
| 23,339,000 | | |
| 27,623,000 | | |
|
Gross profit | |
| 7,523,000 | | |
| 10,136,000 | | |
|
Operating expenses | |
| | | |
| | | |
|
Research and development | |
| 2,617,000 | | |
| 2,816,000 | | |
|
Selling and marketing | |
| 1,166,000 | | |
| 1,876,000 | | |
|
General and administrative | |
| 8,033,000 | | |
| 12,989,000 | | |
|
Impairment of goodwill and intangible assets | |
| - | | |
| 4,681,000 | | |
|
Total operating expenses | |
| 11,816,000 | | |
| 22,362,000 | | |
|
Loss from operations | |
| (4,293,000 | ) | |
| (12,226,000 | ) | |
|
Other income (expense): | |
| | | |
| | | |
|
Interest and other income | |
| 1,594,000 | | |
| 849,000 | | |
|
Interest expense | |
| (1,662,000 | ) | |
| (843,000 | ) | |
|
Loss on extinguishment of debt | |
| - | | |
| (1,397,000 | ) | |
|
Change in fair value of warrant liability | |
| - | | |
| (1,775,000 | ) | |
|
Total other expense, net | |
| (68,000 | ) | |
| (3,166,000 | ) | |
|
Loss before income taxes | |
| (4,361,000 | ) | |
| (15,392,000 | ) | |
|
Income tax benefit | |
| (15,000 | ) | |
| (11,000 | ) | |
|
Net loss | |
| (4,346,000 | ) | |
| (15,381,000 | ) | |
|
Net loss attributable to non-controlling interest | |
| 1,554,000 | | |
| 3,026,000 | | |
|
Net loss available to common stockholders | |
$ | (2,792,000 | ) | |
$ | (12,355,000 | ) | |
The net loss from discontinued operations
for the year ended December 31, 2024 on the consolidated statement of operations and comprehensive loss includes the gain on deconsolidation
as follows:
|
Schedule of gain on deconsolidation | |
| | | |
|
| |
For the Year
Ended
December 31,
2024 | | |
|
GIGA net loss | |
$ | (2,792,000 | ) | |
|
Gain on deconsolidation | |
| 2,013,000 | | |
|
Net loss from discontinued operations | |
$ | (779,000 | ) | |
| | F-23 | | |
| | |
The cash flow activity related to discontinued
operations is presented separately on the statement of cash flows as summarized below:
|
Schedule of statement of cash flows | |
| | | |
| | | |
|
| |
For the Year Ended December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Cash flows from operating activities: | |
| | |
| | |
|
Net loss | |
$ | (4,346,000 | ) | |
$ | (15,381,000 | ) | |
|
Adjustments to reconcile net loss to net cash provided by operating activities: | |
| | | |
| | | |
|
Depreciation and amortization | |
| 618,000 | | |
| 823,000 | | |
|
Amortization of right-of-use assets | |
| 684,000 | | |
| 1,004,000 | | |
|
Amortization of intangibles | |
| 157,000 | | |
| 273,000 | | |
|
Impairment of goodwill and intangible assets | |
| - | | |
| 4,681,000 | | |
|
Stock-based compensation | |
| (858,000 | ) | |
| 1,799,000 | | |
|
Changes in operating assets and liabilities: | |
| | | |
| | | |
|
Accounts receivable | |
| (1,638,000 | ) | |
| 1,157,000 | | |
|
Inventories | |
| 1,514,000 | | |
| 1,789,000 | | |
|
Prepaid expenses and other current assets | |
| (1,516,000 | ) | |
| (1,185,000 | ) | |
|
Lease liabilities | |
| (667,000 | ) | |
| (1,112,000 | ) | |
|
Accounts payable and accrued expenses | |
| (314,000 | ) | |
| 564,000 | | |
|
Net cash used in operating activities | |
| (6,366,000 | ) | |
| (5,588,000 | ) | |
|
Cash flows from investing activities: | |
| | | |
| | | |
|
Purchase of property and equipment | |
| (249,000 | ) | |
| (271,000 | ) | |
|
Cash decrease upon deconsolidation | |
| (3,550,000 | ) | |
| - | | |
|
Net cash used in investing activities | |
| (3,799,000 | ) | |
| (271,000 | ) | |
|
Cash flows from financing activities: | |
| | | |
| | | |
|
Proceeds from notes payable | |
| 2,552,000 | | |
| 3,858,000 | | |
|
Cash contributions from parent | |
| 3,383,000 | | |
| 3,934,000 | | |
|
Net cash provided by financing activities | |
| 5,935,000 | | |
| 7,792,000 | | |
|
| |
| | | |
| | | |
|
Effect of exchange rate changes on cash and cash equivalents | |
| (71,000 | ) | |
| 173,000 | | |
|
| |
| | | |
| | | |
|
Net (decrease) increase in cash and cash equivalents and restricted cash | |
| (4,301,000 | ) | |
| 2,106,000 | | |
|
| |
| | | |
| | | |
|
Cash and cash equivalents and restricted cash at beginning of period | |
| 4,301,000 | | |
| 2,195,000 | | |
|
| |
| | | |
| | | |
|
Cash and cash equivalents and restricted cash at end of period | |
$ | - | | |
$ | 4,301,000 | | |
|
| |
| | | |
| | | |
|
Supplemental disclosures of cash flow information: | |
| | | |
| | | |
|
Cash paid during the period for interest | |
$ | 946,000 | | |
$ | 778,000 | | |
**5. CHANGE IN PLAN OF SALE OF AGREE HOTEL PROPERTIES**
On April 30, 2024, the Company had a change
in plan of sale for its four hotels owned and operated by AGREE. As a result, as of April 30, 2024, the assets no longer met the held
for sale criteria and were required to be reclassified as held and used at the lower of adjusted carrying value or the fair value at the
date of the not to sell.
For presentation purposes, the assets and
liabilities previously held for sale as of December 31, 2023, were reclassified in the December 31, 2023 balance sheet in the accompanying
financial statements back to their original asset and liability groups at their previous carrying values. In connection with this change
in plan of sale, the Company recorded a loss on impairment of property and equipment related to the real estate assets of AGREE of $8.0
million during the year ended December 31, 2024. The fair values of property and equipment related to the real estate assets of AGREE
were based on a discounted cash flow income approach for the hotel properties and a comparable sales market approach for the vacant land
assets.
In connection with the original plan of
sale of AGREE assets, the assets held for sale were measured at the lower of their carrying amount or fair value less cost to sell. The
Company performed a fair value analysis for the disposal group utilizing an income approach for the hotels and a market approach for the
land, resulting in an $6.6 million impairment of property and equipment during the year ended December 31, 2023.
| | F-24 | | |
| | |
**6. REVENUE DISAGGREGATION**
The following tables summarize disaggregated
customer contract revenues and the source of the revenue for the years ended December 31, 2024 and 2023. Revenues from lending and trading
activities included in consolidated revenues were primarily interest, dividend and other investment income, which are not considered to
be revenues from contracts with customers under GAAP. Revenue is presented by reportable segment. The Holding Co. column includes revenue that is not
allocated to a specific reportable segment but is generated within the holding company entity. While not a separate reportable segment,
Holding Co. is included in the table below to reconcile to total consolidated revenue.
The Companys disaggregated revenues
consisted of the following for the year ended December 31, 2024:
|
Schedule of disaggregated revenues | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| |
TurnOnGreen | | |
Fintech | | |
Sentinum | | |
AGREE | | |
Energy | | |
ROI | | |
Holding Co. | | |
Total | | |
|
Primary Geographical Markets | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
North America | |
$ | 4,840,000 | | |
$ | - | | |
$ | 31,474,000 | | |
$ | 18,015,000 | | |
$ | 47,475,000 | | |
$ | 253,000 | | |
$ | 2,523,000 | | |
$ | 104,580,000 | | |
|
Europe | |
| 49,000 | | |
| - | | |
| - | | |
| - | | |
| 116,000 | | |
| - | | |
| - | | |
| 165,000 | | |
|
Middle East and other | |
| 24,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 24,000 | | |
|
Revenue from contracts with customers | |
| 4,913,000 | | |
| - | | |
| 31,474,000 | | |
| 18,015,000 | | |
| 47,591,000 | | |
| 253,000 | | |
| 2,523,000 | | |
| 104,769,000 | | |
|
Revenue, lending and trading activities (North America) | |
| - | | |
| 1,893,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,893,000 | | |
|
Total revenue | |
$ | 4,913,000 | | |
$ | 1,893,000 | | |
$ | 31,474,000 | | |
$ | 18,015,000 | | |
$ | 47,591,000 | | |
$ | 253,000 | | |
$ | 2,523,000 | | |
$ | 106,662,000 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Major Goods or Services | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Power supply units and systems | |
$ | 4,913,000 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 4,913,000 | | |
|
Revenue from mined crypto assets at Sentinum owned and operated facilities | |
| - | | |
| - | | |
| 24,960,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 24,960,000 | | |
|
Revenue from Sentinum crypto mining equipment hosted at third-party facilities | |
| - | | |
| - | | |
| 5,638,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 5,638,000 | | |
|
Hotel and real estate operations | |
| - | | |
| - | | |
| 876,000 | | |
| 18,015,000 | | |
| - | | |
| - | | |
| - | | |
| 18,891,000 | | |
|
Crane rental | |
| - | | |
| - | | |
| - | | |
| - | | |
| 47,475,000 | | |
| - | | |
| - | | |
| 47,475,000 | | |
|
Other | |
| - | | |
| - | | |
| - | | |
| - | | |
| 116,000 | | |
| 253,000 | | |
| 2,523,000 | | |
| 2,892,000 | | |
|
Revenue from contracts with customers | |
| 4,913,000 | | |
| - | | |
| 31,474,000 | | |
| 18,015,000 | | |
| 47,591,000 | | |
| 253,000 | | |
| 2,523,000 | | |
| 104,769,000 | | |
|
Revenue, lending and trading activities | |
| - | | |
| 1,893,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,893,000 | | |
|
Total revenue | |
$ | 4,913,000 | | |
$ | 1,893,000 | | |
$ | 31,474,000 | | |
$ | 18,015,000 | | |
$ | 47,591,000 | | |
$ | 253,000 | | |
$ | 2,523,000 | | |
$ | 106,662,000 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Timing of Revenue Recognition | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Goods and services transferred at a point in time | |
$ | 4,913,000 | | |
$ | - | | |
$ | 31,474,000 | | |
$ | 18,015,000 | | |
$ | 116,000 | | |
$ | 253,000 | | |
$ | 2,523,000 | | |
$ | 57,294,000 | | |
|
Services transferred over time | |
| - | | |
| - | | |
| - | | |
| - | | |
| 47,475,000 | | |
| - | | |
| - | | |
| 47,475,000 | | |
|
Revenue from contracts with customers | |
$ | 4,913,000 | | |
$ | - | | |
$ | 31,474,000 | | |
$ | 18,015,000 | | |
$ | 47,591,000 | | |
$ | 253,000 | | |
$ | 2,523,000 | | |
$ | 104,769,000 | | |
The Companys disaggregated revenues
consisted of the following for the year ended December 31, 2023:
|
| |
TurnOnGreen | | |
Fintech | | |
Sentinum | | |
SMC | | |
AGREE | | |
Energy | | |
ROI | | |
Total | | |
|
Primary Geographical Markets | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
North America | |
$ | 3,879,000 | | |
$ | - | | |
$ | 34,523,000 | | |
$ | 31,099,000 | | |
$ | 16,161,000 | | |
$ | 49,431,000 | | |
$ | 305,000 | | |
$ | 135,398,000 | | |
|
Europe | |
| 29,000 | | |
| - | | |
| - | | |
| 238,000 | | |
| - | | |
| 666,000 | | |
| - | | |
| 933,000 | | |
|
Middle East and other | |
| 293,000 | | |
| - | | |
| - | | |
| 220,000 | | |
| - | | |
| - | | |
| - | | |
| 513,000 | | |
|
Revenue from contracts with customers | |
| 4,201,000 | | |
| - | | |
| 34,523,000 | | |
| 31,557,000 | | |
| 16,161,000 | | |
| 50,097,000 | | |
| 305,000 | | |
| 136,844,000 | | |
|
Revenue, lending and trading activities (North America) | |
| - | | |
| (1,998,000 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,998,000 | ) | |
|
Total revenue | |
$ | 4,201,000 | | |
$ | (1,998,000 | ) | |
$ | 34,523,000 | | |
$ | 31,557,000 | | |
$ | 16,161,000 | | |
$ | 50,097,000 | | |
$ | 305,000 | | |
$ | 134,846,000 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Major Goods or Services | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Power supply units and systems | |
$ | 4,201,000 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 4,201,000 | | |
|
Revenue from mined crypto assets at Sentinum owned and operated facilities | |
| - | | |
| - | | |
| 29,036,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 29,036,000 | | |
|
Revenue from Sentinum crypto mining equipment hosted at third-party facilities | |
| - | | |
| - | | |
| 4,071,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 4,071,000 | | |
|
Hotel and real estate operations | |
| - | | |
| - | | |
| 1,416,000 | | |
| - | | |
| 16,161,000 | | |
| - | | |
| - | | |
| 17,577,000 | | |
|
Karaoke machines and related consumer goods | |
| - | | |
| - | | |
| - | | |
| 31,557,000 | | |
| - | | |
| - | | |
| - | | |
| 31,557,000 | | |
|
Crane rental | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 49,198,000 | | |
| - | | |
| 49,198,000 | | |
|
Other | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 899,000 | | |
| 305,000 | | |
| 1,204,000 | | |
|
Revenue from contracts with customers | |
| 4,201,000 | | |
| - | | |
| 34,523,000 | | |
| 31,557,000 | | |
| 16,161,000 | | |
| 50,097,000 | | |
| 305,000 | | |
| 136,844,000 | | |
|
Revenue, lending and trading activities | |
| - | | |
| (1,998,000 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,998,000 | ) | |
|
Total revenue | |
$ | 4,201,000 | | |
$ | (1,998,000 | ) | |
$ | 34,523,000 | | |
$ | 31,557,000 | | |
$ | 16,161,000 | | |
$ | 50,097,000 | | |
$ | 305,000 | | |
$ | 134,846,000 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Timing of Revenue Recognition | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Goods and services transferred at a point in time | |
$ | 3,853,000 | | |
$ | - | | |
$ | 34,523,000 | | |
$ | 31,557,000 | | |
$ | 16,161,000 | | |
$ | 899,000 | | |
$ | 305,000 | | |
$ | 87,298,000 | | |
|
Services transferred over time | |
| 348,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 49,198,000 | | |
| - | | |
| 49,546,000 | | |
|
Revenue from contracts with customers | |
$ | 4,201,000 | | |
$ | - | | |
$ | 34,523,000 | | |
$ | 31,557,000 | | |
$ | 16,161,000 | | |
$ | 50,097,000 | | |
$ | 305,000 | | |
$ | 136,844,000 | | |
| | F-25 | | |
| | |
**7. FAIR VALUE OF FINANCIAL INSTRUMENTS**
The following table sets forth the Companys
financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy at December 31, 2023
(no material financial instruments that were measured at fair value on a recurring basis at December 31, 2024):
|
Fair value, assets measured on recurring basis | |
| | | |
| | | |
| | | |
| | | |
|
| |
Fair Value Measurement at December 31, 2023 | | |
|
| |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
|
Assets: | |
| | |
| | |
| | |
| | |
|
Investment in common stock of Alzamend a related party | |
$ | 679,000 | | |
$ | 679,000 | | |
$ | - | | |
$ | - | | |
|
Investments in marketable equity securities | |
| 27,000 | | |
| 27,000 | | |
| - | | |
| - | | |
|
Cash and marketable securities held in trust account | |
| 2,200,000 | | |
| 2,200,000 | | |
| - | | |
| - | | |
|
Total assets measured at fair value | |
$ | 2,906,000 | | |
$ | 2,906,000 | | |
$ | - | | |
$ | - | | |
|
Liabilities: | |
| | | |
| | | |
| | | |
| | | |
|
Warrant and embedded conversion feature liabilities | |
$ | 910,000 | | |
$ | - | | |
$ | - | | |
$ | 910,000 | | |
|
Total liabilities measured at fair value | |
$ | 910,000 | | |
$ | - | | |
$ | - | | |
$ | 910,000 | | |
The Company assesses the inputs used to
measure fair value using the three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the
market. For investments where little or no public market exists, managements determination of fair value is based on the best available
information which may incorporate managements own assumptions and involves a significant degree of judgment, taking into consideration
various factors including earnings history, financial condition, recent sales prices of the issuers securities and liquidity risks.
The changes in Level 3 fair value hierarchy
during the years ended December 31, 2024 and 2023 were as follows:
|
Schedule of changes in fair value hierarchy | |
| | | |
| | | |
| | | |
| | | |
|
| |
Level 3 Balance at
Beginning of
Period | | |
Fair Value
Adjustments | | |
Grants | | |
Level 3 Balance at
End of Period | | |
|
Year ended December 31, 2024 | |
| | |
| | |
| | |
| | |
|
Embedded conversion feature liabilities | |
$ | 910,000 | | |
$ | (910,000 | ) | |
$ | - | | |
$ | - | | |
|
| |
| | | |
| | | |
| | | |
| | | |
|
Year ended December 31, 2023 | |
| | | |
| | | |
| | | |
| | | |
|
Warrant liabilities | |
$ | 651,000 | | |
$ | (4,981,000 | ) | |
$ | 4,330,000 | | |
$ | - | | |
|
Embedded conversion feature liabilities | |
$ | 2,316,000 | | |
$ | (2,758,000 | ) | |
$ | 1,352,000 | | |
$ | 910,000 | | |
**8. Equity Investments
for Which Measurement Alternative Has Been Selected**
As of December 31, 2024 and 2023, the Company
held equity investments in other securities valued at $2.8million and $21.8million, respectively, that were valued using a
measurement alternative. These investments are included in other equity securities in the accompanying consolidated balance sheets.
The Company has made cumulative downward
adjustments for impairments for equity securities that do not have readily determinable fair values for the years ended December 31, 2024
and 2023, totaling $8.6 million and $15.8 million, respectively. Approximately $6.3 million of the impairment charge for the years ended
December 31, 2024 was reflected in other income (expense) and $2.3 million of the impairment charge related to Fintech lending operations
and was recorded against revenue from lending and trading activities on the consolidated statement of operations and comprehensive loss.
Approximately $9.6 million of the impairment charge for the year ended December 31, 2023 was reflected in other income (expense) and $6.2
million of the impairment charge related to Fintech lending operations and was recorded against revenue from lending and trading activities
on the consolidated statement of operations and comprehensive loss.
**9. CRYPTO ASSETS**
The following table presents revenue from
mined crypto assets for the years ended December 31, 2024 and 2023:
|
Schedule of revenue from crypto assets | |
| | |
|
| |
For the Year Ended | | |
|
| |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Revenue from mined crypto assets at Sentinum owned and operated facilities | |
$ | 24,960,000 | | |
$ | 29,036,000 | | |
|
Revenue from Sentinum crypto mining equipment hosted at third-party facilities | |
| 5,638,000 | | |
| 4,071,000 | | |
|
Revenue, crypto assets mining | |
$ | 30,598,000 | | |
$ | 33,107,000 | | |
| | F-26 | | |
| | |
The following table presents the activities
of the crypto assets (classified within prepaid expenses and other current assets) for the years ended December 31, 2024 and 2023:
|
Schedule of activities of the crypto assets | |
| | | |
| | | |
|
| |
For the Year Ended | | |
|
| |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Balance at January 1 | |
$ | 546,000 | | |
$ | 554,000 | | |
|
Additions of mined crypto assets | |
| 24,960,000 | | |
| 29,100,000 | | |
|
Sale of crypto assets | |
| (25,350,000 | ) | |
| (29,111,000 | ) | |
|
Payments to vendors with crypto assets | |
| (39,000 | ) | |
| (28,000 | ) | |
|
Payment of notes payable with crypto assets | |
| (506,000 | ) | |
| - | | |
|
Payment of interest payable with crypto assets | |
| (142,000 | ) | |
| - | | |
|
Realized gain on sale of crypto assets | |
| 684,000 | | |
| 520,000 | | |
|
Unrealized gain on crypto assets | |
| 29,000 | | |
| - | | |
|
Impairment of mined crypto assets | |
| - | | |
| (489,000 | ) | |
|
Balance at December 31 | |
$ | 182,000 | | |
$ | 546,000 | | |
**10. INVENTORIES**
At December 31, 2024 and 2023, inventories consisted
of:
|
Schedule of inventories | |
| | | |
| | | |
|
| |
December 31, | | |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Raw materials, parts and supplies | |
$ | 309,000 | | |
$ | 474,000 | | |
|
Finished products | |
| 1,508,000 | | |
| 1,316,000 | | |
|
Total inventories | |
$ | 1,817,000 | | |
$ | 1,790,000 | | |
**11.PROPERTY AND EQUIPMENT, NET**
At December 31, 2024 and 2023, property
and equipment consisted of:
|
Schedule of property and equipment | |
| | | |
| | | |
|
| |
December 31, 2024 | | |
December 31, 2023 | | |
|
Building, land and improvements | |
$ | 80,822,000 | | |
$ | 100,184,000 | | |
|
Crypto assets mining equipment | |
| 12,150,000 | | |
| 50,640,000 | | |
|
Crane rental equipment | |
| 34,588,000 | | |
| 34,469,000 | | |
|
Computer, software and related equipment | |
| 11,308,000 | | |
| 10,533,000 | | |
|
Aircraft | |
| 15,983,000 | | |
| 15,983,000 | | |
|
Other property and equipment | |
| 11,417,000 | | |
| 11,066,000 | | |
|
| |
| 166,268,000 | | |
| 222,875,000 | | |
|
Accumulated depreciation and amortization | |
| (21,911,000 | ) | |
| (27,209,000 | ) | |
|
Property and equipment, net | |
$ | 144,357,000 | | |
$ | 195,666,000 | | |
Summary of depreciation expense:
|
Schedule of depreciation | |
| | |
| | |
|
| |
For the Year Ended December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Depreciation expense | |
$ | 23,784,000 | | |
$ | 26,911,000 | | |
**Impairment of Property and Equipment**
During the year ended December 31, 2024,
due to increases in the Bitcoin mining difficulty level, which compounded the continued impact of the Bitcoin halving event, we concluded
that indicated that an impairment triggering event had occurred. Testing performed indicated the estimated fair value of the Companys
miners to be less than their net carrying value during the year ended December 31, 2024, and an impairment charge of $10.5 million was
recognized, decreasing the net carrying value of the Companys crypto assets mining equipment to their estimated fair value. The
Company valued the miners using an income approach utilizing a discounted cash flow and a discount rate of 20%. The Company estimated
the cash flow from the miners over a two-year period assuming a utilization rate of 98%, a mining difficulty level of 101.6 trillion,
a Bitcoin price of $76,000 and a power cost of $0.055 per kilowatt-hour. The estimated fair value of the Companys miners is classified
in Level 3 of the fair value hierarchy with no observable inputs using a discounted cash flow methodology.
| | F-27 | | |
| | |
In addition, the Company recorded
impairment charges of $8.9 million related to AGREEs real estate assets in each of the years ended December 31, 2024 and 2023.
The fair values of property and equipment related to the real estate assets of AGREE were based on a discounted cash flow income approach
for the hotel properties and a comparable sales market approach for the vacant land assets. Assumptions used in the discounted cash flow
analysis included discount rates between 10.5% and 10.75%, terminal capitalization rates between 8.5% and 8.75% and occupancy rates between
59.2% and 78.8%.
During the year ended December 31, 2023,
certain unforeseen business developments and changes in financial projections at Avalanche International Corp. (AVLP) indicated
that an impairment triggering event had occurred. Testing performed indicated the estimated fair value of AVLP property and equipment
as of December 31, 2023 was $0, and an impairment charge of $14.0 million was recognized, which was based primarily on estimated liquidation
value or expected proceeds from the sale or disposal of the assets.
During the year ended December 31, 2023,
the Company recognized an impairment charge of $4.1 million related to property and equipment at ROI, which was based primarily on estimated
liquidation value or expected proceeds from the sale or disposal of the assets.
**Sale of St. Petersburg Property**
On December 13, 2024, AGREE completed the
sale of its real property located in St. Petersburg, Florida (the Florida Property) for $13.0 million and recorded a gain
on the sale of $0.2 million included in gain on the sale of fixed assets in the consolidated statement of operations.
**12. INTANGIBLE ASSETS, NET**
At December 31, 2024 and 2023, intangible assets consisted
of:
|
Schedule of intangible asset | |
| |
| | | |
| | | |
|
| |
Useful Life | |
December 31, 2024 | | |
December 31, 2023 | | |
|
Definite lived intangible assets: | |
| |
| | |
| | |
|
Developed technology | |
7 years | |
$ | 60,000 | | |
$ | 1,949,000 | | |
|
Customer list | |
10 years | |
| 1,290,000 | | |
| 1,290,000 | | |
|
Trade names | |
12 years | |
| 1,030,000 | | |
| 1,030,000 | | |
|
| |
| |
| 2,380,000 | | |
| 4,269,000 | | |
|
Accumulated amortization | |
| |
| (536,000 | ) | |
| (222,000 | ) | |
|
Total definite-lived intangible assets | |
| |
$ | 1,844,000 | | |
$ | 4,047,000 | | |
Certain of the Companys trade names
and trademarks were determined to have an indefinite life. The remaining definite-lived intangible assets are primarily being amortized
on a straight-line basis over their estimated useful lives.
Summary of amortization expense:
|
Schedule of amortization expense | |
| | |
| | |
|
| |
For the Year Ended | | |
|
| |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Amortization expense | |
$ | 653,000 | | |
$ | 1,041,000 | | |
As of December 31, 2024, intangible assetssubject
to amortizationhad an average remaining useful life of 6.9 years. The following table presents estimated amortization expense for
each of the succeeding five calendar years and thereafter.
|
Schedule of estimated amortization expense | |
| | | |
|
2025 | |
| 324,000 | | |
|
2026 | |
| 264,000 | | |
|
2027 | |
| 264,000 | | |
|
2028 | |
| 264,000 | | |
|
2029 | |
| 264,000 | | |
|
Thereafter | |
| 464,000 | | |
|
| |
$ | 1,844,000 | | |
| | F-28 | | |
| | |
During the year ended December 31, 2024,
the Company recognized $1.5 million impairment of intangible assets related to Eco Pack. Based on internally developed forecasts of undiscounted
expected future cash flows, it was determined that the carrying amount of the assets was not recoverable.
During the year ended December 31, 2023,
the Company recognized $24.3 million impairment of intangible assets related to AVLP. Due to indicators of impairment, AVLP intangible
assets were tested for impairment during the year ended December 31, 2023. Based on internally developed forecasts of undiscounted expected
future cash flows, it was determined that the carrying amount of the assets were not recoverable.
The tradenames and patents/developed technology
intangible assets were valued using the relief-from-royalty method. The relief-from-royalty method is one of the methods under the income
approach whereby estimates of a companys earnings attributable to the intangible asset are based on the royalty rate the Company
would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying royalty rates of 18% for patents
and developed technology and 0.25% for trademarks. The resulting net annual royalty payments are then discounted to present value using
a discount factor of 25.7%.
**13. GOODWILL IMPAIRMENT**
The Company tests the recorded amount of
goodwill for impairment on an annual basis on December 31 or more frequently if there are indicators that the carrying amount of the goodwill
exceeds its carried value. The Company performed a goodwill impairment test as of June 30, 2023 related to AVLP as there were indicators
of impairment related to certain unforeseen business developments and changes in financial projections.
The valuation of AVLP was determined using
an income approach methodology of valuation. The income approach is based on the projected cash flows discounted to their present value
using discount rates, that in the Companys judgment, consider the timing and risk of the forecasted cash flows using internally
developed forecasts and assumptions. Under the income approach, the discount rate used is the average estimated value of a market participants
cost of capital and debt, derived using customary market metrics. The analysis included assumptions regarding AVLPs revenue forecast
and discount rates of 26.7% using a weighted average cost of capital analysis. The market approach was also considered; however, the income
approach was chosen as the Company determined it was a better representation of AVLPs projected long-term performance.
The results of the quantitative test
indicated that the fair value of the AVLP reporting unit did not exceed its carrying amounts, including goodwill, in excess of the
carrying value of the goodwill. As a result, the entire $18.6
million carrying amount of AVLPs goodwill was recognized as a non-cash impairment charge during the year ended December 31,
2023.
**14. INVESTMENTS RELATED PARTIES**
Investments in Alzamend, Ault & Company, Inc. (Ault
& Company) and GIGA at December 31, 2024 and 2023, were comprised of the following:
**Investment in Promissory Notes, Related Parties
Ault & Company and GIGA**
|
Schedule of investment | |
| |
| |
| | | |
| | | |
|
| |
Interest | |
| |
December 31, | | |
December 31, | | |
|
| |
Rate | |
Due Date | |
2024 | | |
2023 | | |
|
Promissory note and accrued interest receivable, Ault & Company | |
8% | |
December 31, 2024 | |
$ | 2,468,000 | | |
$ | 3,068,000 | | |
|
Promissory note and accrued interest receivable, GIGA | |
6% - 12% | |
In bankruptcy | |
| 18,499,000 | | |
| - | | |
|
Other | |
| |
| |
| 335,000 | | |
| 900,000 | | |
|
Allowance for credit losses | |
| |
| |
| (500,000 | ) | |
| - | | |
|
Total investment in promissory notes and other, related parties | |
| |
| |
$ | 20,802,000 | | |
$ | 3,968,000 | | |
Amounts above are recorded in Investment
in promissory notes and other, related party on the consolidated balance sheets.
Summary of interest income, related party,
recorded within interest and other income on the consolidated statement of operations:
|
Schedule of Interest income, related party | |
| | |
| | |
|
| |
For the Year Ended | | |
|
| |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Interest income, related party | |
$ | 1,694,000 | | |
$ | 1,308,000 | | |
| | F-29 | | |
| | |
At each reporting date, the Company applies
its judgment to evaluate the collectability of the note receivable and makes a provision based on the assessed amount of expected credit
loss. This judgment is based on parameters such as interest rates, market conditions and creditworthiness of the creditor.
The Company determined that the collectability
of certain notes receivables is doubtful based on information available.
Upon the deconsolidation
of GIGA, the Company established an allowance for credit losses of $2.6 million related to notes receivable from GIGA included
in net gain (loss) from discontinued operations. As of December 31, 2024, the Company performed an analysis of the allowance for
credit losses of the GIGA notes receivable resulting in a $2.1 million reduction in the allowance, which was recorded within cost of
revenue from lending and trading activities.
**Investment in Alzamend Series B Convertible Preferred
Stock, Warrants and Common Stock, Related Parties Alzamend**
|
Schedule of investment in common stock | |
| | | |
| | | |
| | | |
|
| |
Investments in common stock, related parties at December 31, 2024 | | |
|
| |
Cost | | |
Gross unrealized losses | | |
Fair value | | |
|
Common shares | |
$ | 24,697,000 | | |
$ | (24,607,000 | ) | |
$ | 90,000 | | |
|
Alzamend series B convertible preferred stock, warrants | |
| 2,100,000 | | |
| - | | |
| 2,100,000 | | |
|
| |
$ | 26,797,000 | | |
$ | (24,607,000 | ) | |
$ | 2,190,000 | | |
|
| |
Investments in common stock, related parties at December 31, 2023 | | |
|
| |
Cost | | |
Gross unrealized losses | | |
Fair value | | |
|
Common shares | |
$ | 24,688,000 | | |
$ | (24,009,000 | ) | |
$ | 679,000 | | |
Amounts above are recorded in Investments
in common stock and equity securities, related party on the consolidated balance sheets.
The following tables summarize the changes
in the Companys investments in Alzamend common stock during the years ended December 31, 2024 and 2023:
|
Schedule of investment in warrants and common stock | |
| | | |
| | | |
|
| |
For the Year Ended December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Balance at January 1 | |
$ | 679,000 | | |
$ | 6,449,000 | | |
|
Investment in common stock of Alzamend | |
| 9,000 | | |
| 15,000 | | |
|
Unrealized loss in common stock of Alzamend | |
| (598,000 | ) | |
| (5,785,000 | ) | |
|
Balance at December 31 | |
$ | 90,000 | | |
$ | 679,000 | | |
**Ault Lending Investment in Alzamend Series B Convertible
Preferred Stock and Warrants**
|
Schedule of investment in warrants and preferred stock | |
| | |
| | |
|
| |
December 31, | | |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Investment in Alzamend preferred stock | |
$ | 2,100,000 | | |
$ | - | | |
|
Total investment in other investments securities, related party | |
$ | 2,100,000 | | |
$ | - | | |
In connection with a securities purchase
agreement entered into with Alzamend in January 2024, Ault Lending purchased 2,100 shares of Alzamend Series B Convertible Preferred Stock
and warrants to purchase 0.2 million shares of Alzamend common stock with a five-year term and an exercise price of $12.00 per share for
a total purchase price of $2.1 million.
The agreement provided that Ault Lending
may purchase up to $6 million of Alzamend Series B Convertible Preferred Stock in one or more closings. There have been not been additional
closings subsequent to January 2024 and the agreement terminated by its own terms on March 31, 2025.
The Company has elected to account for investment
in other investments securities, related party, using a measurement alternative under which they are measured at cost and adjusted for
observable price changes and impairments.
Messrs. Ault, Horne and Nisser are each
paid $50,000annually by Alzamend.
| | F-30 | | |
| | |
**VIE Considerations for Ault Lendings Investments
in Alzamend**
Alzamend is considered a VIE based on the
Ault Lendings investment in Alzamend common stock, Series B convertible preferred stock and warrants. However, Ault Lending is
not deemed to be the primary beneficiary of Alzamend and therefore does not consolidate Alzamend in its financial statements. Ault Lendings
maximum exposure to loss as a result of its involvement with Alzamend is limited to the $2.2 million carrying value of its investments.
**15. EQUITY METHOD INVESTMENT**
**Equity Investments in Unconsolidated Entity SMC**
On November 20, 2023, SMC, a consolidated
VIE of the Company, completed a transaction pursuant to which the Companys share ownership of SMC was diluted to approximately
28%. Due to the significant change in Ault Alliances ownership and voting rights, the Company determined that it no longer met
the criteria of the primary beneficiary and, accordingly, the Company deconsolidated SMC as of November 20, 2023. The Company recorded
a $3.0 million loss on deconsolidation for the year ended December 31, 2023.
Upon deconsolidation, the Company recorded
its retained investment in SMC based upon the fair value of the common shares held by the Company at November 20, 2023. Due to the Companys
significant influence over SMC, the Company began accounting for its retained interest under the equity method of accounting.
The following table summarizes the changes
in the Companys equity investments in an unconsolidated entity, SMC, included in other assets on the consolidated balance sheet,
during the year ended December 31, 2024:
|
Schedule of equity investments in unconsolidated entity SMC | |
| | | |
|
Rollforward investment in unconsolidated entity | |
Amount | | |
|
Beginning balance - January 1, 2024 | |
$ | 1,957,000 | | |
|
Loss from investment in unconsolidated entity | |
| (1,957,000 | ) | |
|
Ending balance - December 31, 2024 | |
$ | - | | |
On September 5, 2024, three of the Companys
employees resigned from the board of directors of SMC. As a result of the resignations, and as the Company owned less than 20% of SMC
at the time, the Company no longer had the ability to exert significant influence over the operating and financial policies of SMC. The
Company discontinued the equity method of accounting for the investment in SMC on September 5, 2024. As a result, the Company changed
its accounting for SMC to an investment in marketable equity securities and recognized the investment at fair value, with a gain of $1.3
million recognized as revenue from lending and trading activities in the consolidated statement of operations and comprehensive loss.
The following table provides summarized
financial information for the Companys ownership interest in SMC accounted for under the equity method for the December 31, 2023
period presented and has been compiled from SMCs financial statements. Amounts presented represent totals at the investee level
and not the Companys proportionate share:
**Summarized Statements of Operations**
|
Schedule of summarized statements of operations | |
| | |
|
| |
For the Year Ended | | |
|
| |
December 31, | | |
|
| |
2023 | | |
|
Revenue | |
$ | 32,581,000 | | |
|
Gross profit | |
$ | 6,964,000 | | |
|
Loss from operations | |
$ | (8,290,000 | ) | |
|
Net loss | |
$ | (9,384,000 | ) | |
**Summarized Balance Sheet Information**
|
| |
December 31, | | |
|
| |
2023 | | |
|
Current assets | |
$ | 23,206,000 | | |
|
Non-current assets | |
$ | 4,509,000 | | |
|
Current liabilities | |
$ | 16,209,000 | | |
|
Non-current liabilities | |
$ | 3,928,000 | | |
| | F-31 | | |
| | |
**16. CONSOLIDATED VARIABLE INTEREST ENTITY - ALPHA FUND**
**Alpha Fund Consolidated Variable Interest Entity**
As of December 31, 2022, the Company held
an investment in the Alpha Fund. The Alpha Fund was liquidated during the year ended December 31, 2023. Alpha Fund operated as a private
investment fund. The general partner of Alpha Fund, Ault Alpha GP LLC (Alpha GP) was owned by Ault Capital Management LLC
(the Investment Manager), which also acted as the investment manager to Alpha Fund. The Investment Manager was owned by
Ault & Company. Messrs. Ault, Horne, Nisser and Cragun, who serve as executive officers and/or directors of the Company, were executive
officers of the Investment Manager, and Messrs. Ault, Horne and Nisser are executive officers and directors of Ault & Company.
Prior to the liquidation of the Alpha Fund,
the Company consolidated Alpha Fund as a VIE due to its significant level of influence and control of Alpha Fund, the size of its investment,
and its ability to participate in policy making decisions. The Company was considered the primary beneficiary of the VIE.
**17. BUSINESS COMBINATIONS**
**ROI Acquisition**
On March 6, 2023, the Company closed a
share exchange agreement with ROI and sold to ROI all the outstanding shares of capital stock of the Companys subsidiary, BitNile.com,
Inc. as well as RiskOn360, Inc. (formerly known as Ault Iconic, Inc.) and the securities of Earnity, Inc. beneficially owned by BitNile.com,
Inc. as of the date of the Agreement. As consideration for the acquisition, ROI issued shares of preferred stock that could have been
convertible into common stock, subject to shareholder approval, of ROI representing approximately 73.2% of ROIs outstanding common
stock at the time of the transaction. Total consideration included $0.3 million purchase consideration, representing the fair value of
ROI common stock acquired by the Company, and $6.4 million allocated for the fair value of the non-controlling interest.
**18. WARRANTS**
A summary of warrant activity for the years
ended December 31, 2024 and 2023 is presented below.
|
Schedule of warrants | |
| | | |
| | | |
| | | |
|
| |
Warrants | | |
Weighted- Average Exercise Price | | |
Weighted- Average Remaining Contractual Life (Years) | | |
|
Outstanding at January 1, 2023 | |
| 52 | | |
$ | 589,255 | | |
| 3.9 | | |
|
Granted | |
| 405,042 | | |
| 124.25 | | |
| 5.0 | | |
|
Forfeited | |
| - | | |
| - | | |
| | | |
|
Exercised | |
| - | | |
| - | | |
| | | |
|
Outstanding at December 31, 2023 | |
| 405,094 | | |
| 178.50 | | |
| 4.7 | | |
|
Granted | |
| 71,794 | | |
| 118.39 | | |
| 5.0 | | |
|
Forfeited | |
| - | | |
| - | | |
| | | |
|
Exercised | |
| - | | |
| - | | |
| | | |
|
Outstanding at December 31, 2024 | |
| 476,888 | | |
$ | 162.68 | | |
| 3.9 | | |
The following table summarizes information
about common stock warrants outstanding at December 31, 2024:
|
Schedule of common stock warrants outstanding | |
| |
| |
| |
|
| | |
| | |
|
Outstanding | |
|
Exercisable | | |
|
| |
| |
Weighted | |
| |
|
| | |
| | |
|
| |
| |
Average | |
Weighted | |
|
| | |
Weighted | | |
|
| |
| |
Remaining | |
Average | |
|
| | |
Average | | |
|
Exercise | |
Number | |
Contractual | |
Exercise | |
|
Number | | |
Exercise | | |
|
Price | |
Outstanding | |
Life (Years) | |
Price | |
|
Exercisable | | |
Price | | |
|
$118.39 | |
422,337 | |
4.0 | |
$ | 118.39 | |
|
| 422,337 | | |
$ | 118.39 | | |
|
$160.74 | |
54,498 | |
3.8 | |
$ | 160.74 | |
|
| 54,498 | | |
$ | 160.74 | | |
|
$118,125 - $656,250 | |
53 | |
1.9 | |
$ | 355,118 | |
|
| 53 | | |
$ | 355,118 | | |
|
$118.39 - $656,250 | |
476,888 | |
3.9 | |
$ | 162.68 | |
|
| 476,888 | | |
$ | 162.68 | | |
| | F-32 | | |
| | |
**Warrant Issuances During 2024**
During the year ended December 31, 2024,
the Company issued warrants to purchase 0.1 million shares of Class A common stock at a weighted average exercise price of $118.39 per
share, subject to adjustment, in connection with the issuance of Series C convertible preferred stock (the Series C Preferred Stock)
to a related party (see Note 29).
**Warrant Issuances During 2023**
During the year ended December 31, 2023,
the Company issued warrants to purchase 0.4 million shares of Class A common stock at a weighted average exercise price of $124.08 per
share, subject to adjustment, in connection with the issuance of a senior secured convertible promissory note, related party (see Note
26) and Series C Preferred Stock to a related party (see Note 29).
The Company has valued the warrants issued
at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent upon several variables such as the warrants
remaining contractual term, exercise price, current stock price, risk-free interest rate and estimated volatility of the Companys
stock over the contractual term of the warrants. The risk-free interest rate used in the calculations is based on the implied yield available
on U.S. Treasury issues with an equivalent term approximating the contractual life of the warrants.
The Company utilized a variety of pricing
models and the weighted average assumptions used during the years ended December31, 2024 and 2023 were as follows:
|
Schedule of weighted average assumptions | |
| | | |
| | | |
|
| |
December 31, 2024 | | |
December 31, 2023 | | |
|
Exercise price | |
$ | 118.39 | | |
$ | 124.08 | | |
|
Contractual term in years | |
| 5.0 | | |
| 5.0 | | |
|
Volatility | |
| 153 | % | |
| 168 | % | |
|
Dividend yield | |
| 0 | % | |
| 0 | % | |
|
Risk-free interest rate | |
| 4.2 | % | |
| 4.0 | % | |
**19.ACCOUNTS PAYABLE AND ACCRUED EXPENSES**
Other current liabilities at December 31, 2024 and
2023 consisted of:
|
Schedule of other current liabilities | |
| | | |
| | | |
|
| |
December 31, | | |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Accounts payable | |
$ | 25,182,000 | | |
$ | 26,777,000 | | |
|
Accrued payroll and payroll taxes | |
| 2,342,000 | | |
| 8,237,000 | | |
|
Interest payable | |
| 8,249,000 | | |
| 4,197,000 | | |
|
Accrued legal | |
| 2,399,000 | | |
| 2,340,000 | | |
|
Other accrued expenses | |
| 21,303,000 | | |
| 13,871,000 | | |
|
Total | |
$ | 59,475,000 | | |
$ | 55,422,000 | | |
During the year ended December 31, 2024, Ault Lending
reversed a previously accrued $5.7 million performance bonus related to realized gains on trading activities. Management determined that
the bonus would not be paid, and accordingly, the reversal was recorded as a reduction to general and administrative expenses.
**20. LEASES**
The Company has operating leases for office
space. The Companys leases have remaining lease terms of 1.1 yearsto9.0 years, some of which may include options to
extend the leases perpetually, and some of which may include options to terminate the leases within one year.
The following table provides a summary of
leases by balance sheet category as ofDecember 31, 2024 and 2023:
|
Schedule of supplemental balance sheet information related to leases | |
| | | |
| | | |
|
| |
December 31, 2024 | | |
December 31, 2023 | | |
|
Operating right-of-use assets | |
$ | 3,697,000 | | |
$ | 3,409,000 | | |
|
Operating lease liability - current | |
| 1,627,000 | | |
| 1,376,000 | | |
|
Operating lease liability - non-current | |
| 2,269,000 | | |
| 2,163,000 | | |
| | F-33 | | |
| | |
The components of lease expenses for theyears
ended December 31, 2024 and 2023,were as follows:
|
Schedule of lease expenses | |
| | | |
| | | |
|
| |
Year Ended December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Operating lease cost | |
$ | 1,918,000 | | |
$ | 2,390,000 | | |
|
Short-term lease cost | |
| - | | |
| - | | |
The following tables provides a summary
of other information related to leases for theyears ended December 31, 2024 and 2023:
|
Schedule of supplemental cash flow information related to leases | |
| | | |
| | | |
|
| |
December 31, 2024 | | |
December 31, 2023 | | |
|
Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| | |
|
Operating cash flows from operating leases | |
$ | 1,654,000 | | |
$ | 2,342,000 | | |
|
Right-of-use assets obtained in exchange for new operating lease liabilities | |
$ | 2,080,000 | | |
$ | 820,000 | | |
|
Weighted-average remaining lease term - operating leases | |
| 3.2 years | | |
| 2.3 years | | |
|
Weighted-average discount rate - operating leases | |
| 8.0 | % | |
| 7.0 | % | |
Maturity of lease liabilities under the
Companys non-cancellable operating leases as ofDecember 31, 2024, were as follows:
|
Schedule of maturities of operating lease liabilities | |
| | | |
|
Paymentsduebyperiod | |
| | |
|
2025 | |
$ | 1,888,000 | | |
|
2026 | |
| 1,210,000 | | |
|
2027 | |
| 514,000 | | |
|
2028 | |
| 339,000 | | |
|
2029 | |
| 329,000 | | |
|
Thereafter | |
| 166,000 | | |
|
Total lease payments | |
| 4,446,000 | | |
|
Less interest | |
| (550,000 | ) | |
|
Present value of lease liabilities | |
$ | 3,896,000 | | |
**21. DIVIDEND PAYABLE IN TURNONGREEN COMMON STOCK**
In March 2024, the Company, in connection
with a planned distribution of its common stock holdings of TurnOnGreen, announced the distribution to its stockholders of 25.0 million
shares of TurnOnGreen common stock and warrants to purchase 25.0 million shares of TurnOnGreen common stock, which resulted in an adjustment
to additional paid in capital and increase to non-controlling interest of $4.9 million based on the recorded value of the Companys
holdings in TurnOnGreen at the record date of the distribution.
**22. ROI Transfers
of White River Common Stock**
In January 2024, ROI announced that it had
concluded that, for regulatory reasons, ROI would be unable to effect the distribution of its shares of common stock of White River as
contemplated by a registration statement previously filed by White River. During the year ended December 31, 2024, ROI transferred 12.0
million shares of White River common stock with a fair value of $19.2 million at the date of transfer to certain of its accredited investors
to resolve the matters discussed above.
In conjunction with the transfers to non-controlling
interests, shares of ROIs investment in White Rivers Series A Convertible Preferred Stock were converted into shares of
White River common stock, resulting in a non-cash $17.9 million gain on conversion.
**23. REDEEMABLE NON-CONTROLLING INTERESTS IN EQUITY OF SUBSIDIARY
LIABILITY**
The Company records redeemable non-controlling
interests in equity of subsidiaries to reflect the economic interests of the common stockholders in Ault Disruptive.
| | F-34 | | |
| | |
**Redemption of Shares**
On September 27, 2024, Ault Disruptive announced
that it would redeem all of its outstanding shares of common stock which occurred as of the close of business on October 11, 2024, because
Ault Disruptive would not consummate an initial business combination within the time period required by its Amended and Restated Certificate
of Incorporation, as amended. During the year ended December 31, 2024, shares of Ault Disruptive common stock were redeemed for an aggregate
redemption amount of $2.3 million.
The following table summarizes the changes
in the Companys redeemable non-controlling interests in equity of subsidiaries during the year December 31, 2024 and 2023:
|
Redeemable noncontrolling interests in equity of subsidiary liability | |
| | | |
| | | |
|
| |
For the Year Ended | | |
|
| |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Redeemable non-controlling interests in equity of subsidiaries as of January 1 | |
$ | 2,224,000 | | |
$ | 117,993,000 | | |
|
Redemption of Ault Disruptive common stock | |
| (2,269,000 | ) | |
| (120,064,000 | ) | |
|
Extension proceeds paid by the Ault Disruptive sponsor | |
| - | | |
| 2,332,000 | | |
|
Remeasurement of carrying value to redemption value | |
| 45,000 | | |
| 1,963,000 | | |
|
Redeemable non-controlling interests in equity of subsidiaries as of December 31 | |
$ | - | | |
$ | 2,224,000 | | |
| | F-35 | | |
| | |
**24. NOTES PAYABLE**
Notes payable at December 31, 2024 and 2023,
were comprised of the following:
|
Schedule of notes payable | |
| |
| |
| |
| |
| |
| | | |
| | | |
|
| |
Collateral | |
Guarantors | |
Interest rate | |
Effective rate(1) | |
Due date | |
December 31, 2024 | | |
December 31, 2023 | | |
|
AGREE secured construction loans (in default) | |
AGREE hotels | |
- | |
7.0% | |
8.8% | |
March 31, 2026 | |
$ | 68,750,000 | | |
$ | 67,632,000 | | |
|
Circle 8 revolving credit facility | |
Circle 8 cranes with a book value of $29.6 million | |
- | |
8.4% | |
8.4% | |
December 16, 2025 | |
| 13,126,000 | | |
| 15,907,000 | | |
|
16% promissory note | |
- | |
Ault & Company and Milton C. Ault, III | |
16.0% (default rate of 24.0%) | |
- | |
- | |
| - | | |
| 2,572,000 | | |
|
Circle 8 equipment financing notes | |
Circle 8 equipment with a book value of $4.3 million | |
- | |
10.5% | |
10.5% | |
September 15, 2025 through June 15, 2027 | |
| 2,826,000 | | |
| 5,629,000 | | |
|
15% term notes (in default) | |
- | |
Milton C. Ault, III | |
15.0% (default rate of 22.99%) | |
48.0% | |
October 31, 2024 | |
| 3,777,000 | | |
| - | | |
|
8% demand loans | |
- | |
- | |
10.0% (12.0% default rate) | |
- | |
Upon demand | |
| - | | |
| 950,000 | | |
|
Sentinum note payable | |
- | |
- | |
12.5% | |
- | |
- | |
| - | | |
| 1,067,000 | | |
|
ROI promissory note (in default) | |
- | |
- | |
15.0% (default rate of 18.0%) | |
67.2% | |
April 30, 2024 | |
| 2,367,000 | | |
| - | | |
|
Other ($3.4 million in default) | |
- | |
- | |
- | |
| |
- | |
| 5,826,000 | | |
| 3,808,000 | | |
|
Total notes payable | |
| |
| |
| |
| |
| |
$ | 96,672,000 | | |
$ | 97,565,000 | | |
|
Less: | |
| |
| |
| |
| |
| |
| | | |
| | | |
|
Unamortized debt discounts | |
| |
| |
| |
| |
| |
| - | | |
| (453,000 | ) | |
|
Total notes payable, net | |
| |
| |
| |
| |
| |
$ | 96,672,000 | | |
$ | 97,112,000 | | |
|
Less: current portion | |
| |
| |
| |
| |
| |
| (95,768,000 | ) | |
| (11,692,000 | ) | |
|
Notes payable long-term portion | |
| |
| |
| |
| |
| |
$ | 904,000 | | |
$ | 85,420,000 | | |
|
(1) | Includes forbearance and extension fees and OID costs that are amortized to interest expense over the
life of the notes. | |
| | F-36 | | |
| | |
During the year ended December 31, 2023,
the holders of $8.4 million 10% secured promissory notes exchanged their notes and accrued interest for preferred stock liabilities. The
Company recorded a loss on extinguishment of debt of $0.1 million related to the transaction. When the preferred stock liabilities converted
to Series A Common stock, the Company recorded a loss on extinguishment of $1.5 million.
During the year ended December 31, 2023, the holders of $10.5
million 10% demand promissory notes and $1.1 million 12% demand promissory notes exchanged their notes for notes from Ault & Company
(see Note 22), resulting in a loss on extinguishment of debt of $0.4 million.
In connection with the December 2023 Series
C Preferred Stock offering (see Note 29), the Company paid $20.4 million to pay the $20.2 million outstanding balance of the 8% senior
secured promissory notes, plus $0.2 million accrued interest payable. The 8% senior secured promissory notes had an unamortized debt discount
of $3.2 million outstanding, which was recorded as a loss on extinguishment of debt.
The Company recorded a $2.0 million loss
on extinguishment of debt related to the April 2023 restructuring related to one of the 16% promissory notes payable.
**OID Only Term Note**
On July 2, 2024, the Company entered into
a term note agreement with institutional investors for the sale of up to $2.6 million in term notes, of which the principal amount of
$1.8million was immediately funded. A term note was issued at a discount, with net proceeds to the Company of $1.5million.
The term note does not accrue any interest. The term note was scheduled to mature on August 2, 2024. The term note is guaranteed by Mr.
Ault. The term note maturity was extended to September 30, 2024, and an extension fee of $0.2 million accrues monthly until the term note
is paid in full. The term note is currently in default and is included in Other in the table above.
**ROI 15% Term Note**
On February 9, 2024, ROI entered into a
$1.77 million term note agreement with an institutional investor bearing interest of 15%. The term note was issued at a discount, with
net proceeds to ROI of $1.75 million. The term note was scheduled to mature February 14, 2024. This note has been guaranteed by Ault &
Company and Mr. Ault. The term note was subsequently amended to increase the principal amount due to $2.4 million, increase the interest
rate to 18% and extend the maturity date to April 30, 2024. The term note is in default as of May 1, 2024.
In February 2025, term note was amended
to increase the principal amount due to $2.6 million, increase the interest rate to 18% and extend the maturity date to May 15, 2025.
**15% Term Notes**
Between April 29, 2024 and August 29, 2024,
the Company entered into note agreements totaling $6.0 million with an institutional investor bearing interest of 15%. The term notes
were issued at a discount, with net proceeds to the Company of $5.1million. The term notes were amended to extend the maturity dates
to October 31, 2024. The notes are in default as of November 1, 2024.
In December 2024, Ault Lending had a fees
receivable from the institutional investor in the amount of $2.2 million related to Ault Lendings profit participation rights in
an investment made by the institutional investor to Alzamend. On December 31, 2024, the Company and the institutional investor agreed
to offset $2.2 million of the term notes payable against the fees receivable. This transaction was accounted for as a non-cash settlement
of financial instruments and had no impact on the Companys consolidated statement of operations.
In February 2025, the Company entered into
an exchange agreement with the institutional investor, pursuant to which the Company issued to the investor a convertible promissory note
in the principal face amount of $1.9 million in exchange for the cancellation of one of the outstanding 15% term notes issued by the Company
to the institutional investor that had outstanding principal and accrued but unpaid interest of $1.9 million.
In March 2025, the Company entered into
an exchange agreement with the institutional investor, pursuant to which the Company issued to the investor a convertible promissory note
in the principal face amount of $4.2 million in exchange for the cancellation of the outstanding 15% term notes issued by the Company
to the institutional investor that had outstanding principal and accrued but unpaid interest of $4.2 million.
| | F-37 | | |
| | |
The note will mature on June 30, 2025. The
note is convertible into shares of the Companys Class A common stock at a conversion price equal to the greater of (i) $0.40 per
share (the Floor Price), which Floor Price shall not be adjusted for stock dividends, stock splits, stock combinations and
other similar transactions and (ii) the lesser of 75% of the VWAP (as defined in the note) of the Class A common stock during the five
trading days immediately prior to (A) the date of issuance of the note or (B) the date of conversion into shares of Class A common stock.
The Company may not issue shares to the extent such issuances would result in an aggregate number of shares of Class A common stock exceeding
19.99% of the total shares of Class A common stock issued and outstanding as of the date of issuance of the note, in accordance with the
rules and regulations of the NYSE unless the Company first obtains stockholder approval.
**$20 Million Credit Agreement**
On June 4, 2024 the Company entered into
a Loan Agreement (the Credit Agreement) with two institutional investors (collectively, the Lender). The Credit
Agreement provides for an unsecured, non-revolving credit facility with an aggregate draw limit of $20.0 million. However, the Company
is restricted to having no more than $2.0 million in principal amount of outstanding advances at any given time under the Credit Agreement.
As of December 31, 2024, $2.0 million has been advanced, exclusive of a $0.4 million OID.
All loans under the Credit Agreement will
be evidenced by a promissory note. The Lender made an advance to the Company of $1.5 million on the execution date. The advances were
due December 4, 2024, however, per the terms of the Credit Agreement as the Company had executed an equity line of credit agreement relating
to the sale of shares of the Companys 13.00% Series D Cumulative Redeemable Perpetual Preferred Stock (the Series D Preferred
Stock), has an effective registration statement relating thereto, the maturity date was automatically extended until June 4, 2025.
The Lender is not obligated to make any further advances under the Credit Agreement after the maturity date. Advances under the Credit
Agreement will include the addition of an OID of 20% to the amount of each advance and all advances will bear interest at the rate of
15.0% per annum and may be repaid at any time without penalty or premium. Amounts outstanding under the Credit Agreement are included
in Other in the table above.
The obligations of the Company under the
Credit Agreement are secured by a guaranty provided by Milton C. Ault, the Executive Chairman of the Company.
**Circle 8 Revolving Credit Facility**
On October 16, 2024, Circle 8 was in default
related to reporting requirements under the terms of their revolving credit facility. Circle 8 was able to obtain waivers to cure the
event of default and defer the requirements until May 31, 2025.
**Amendment to AGREE Secured Construction Loans**
The AGREE secured construction loans with
an original due date of January 1, 2025, were amended on February 2, 2025, whereby AGREE agreed to pay monthly installments of interest
only based on an annualized interest rate of Term SOFR plus 4.75%. In addition, AGREE agreed to make principal payments of $1.0 million
in June 2025 and $2.0 million in September 2025 and December 2025 with the balance due March1, 2026. AGREE has defaulted by failure
to make timely payments per the amended payment terms.
**Notes Payable Maturities**
Principal maturities of the Companys
notes payable, assuming the exercise of all extensions that are exercisable solely at the Companys option, as of December 31, 2024
were:
|
Schedule of maturities | |
| | | |
|
Year | |
| | |
|
2025 | |
$ | 95,768,000 | | |
|
2026 | |
| 794,000 | | |
|
2027 | |
| 110,000 | | |
|
| |
$ | 96,672,000 | | |
**Interest Expense**
Interest expense includes amounts incurred on
notes payable, convertible notes payable, and notes payable to related parties. The components of interest expense for the years ended
December 31, 2024 and 2023 were as follows:
|
Schedule of interest expense | |
| | | |
| | | |
|
| |
For the Year Ended | | |
|
| |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Contractual interest expense | |
$ | 11,925,000 | | |
$ | 17,338,000 | | |
|
Forbearance fees | |
| 2,214,000 | | |
| 5,469,000 | | |
|
Amortization of debt discount | |
| 5,532,000 | | |
| 21,507,000 | | |
|
Total interest expense | |
$ | 19,671,000 | | |
$ | 44,314,000 | | |
| | F-38 | | |
| | |
**25. NOTES PAYABLE, RELATED PARTY**
Notes payable, related party at December
31, 2024 and 2023, were comprised of the following:
|
Schedule of notes payable, related party | |
| |
| |
| |
| | | |
| | | |
|
| |
Interest rate | |
Effective rate | |
Due date | |
December 31, 2024 | | |
December 31, 2023 | | |
|
Notes from officers - Hyperscale Data | |
18% | |
18% | |
- | |
$ | - | | |
$ | 98,000 | | |
|
Notes from officers - TurnOnGreen | |
14% | |
14% | |
Past due | |
| 46,000 | | |
| 51,000 | | |
|
Notes from board member - ROI | |
No interest | |
No interest | |
Upon demand | |
| - | | |
| 90,000 | | |
|
Ault & Company advances | |
No interest | |
No interest | |
Upon demand | |
| - | | |
| 1,909,000 | | |
|
Other related party advances | |
No interest | |
No interest | |
Upon demand | |
| 118,000 | | |
| 227,000 | | |
|
Total notes payable | |
| |
| |
| |
$ | 164,000 | | |
$ | 2,375,000 | | |
**Ault & Company Loan Agreement**
On June 8, 2023, the Company entered into
a loan agreement with Ault & Company as lender. The loan agreement provides for an unsecured, non-revolving credit facility in an
aggregate principal amount of up to $10 million. All loans under the loan agreement are due within five business days after request by
Ault & Company. Ault & Company is not obligated to make any further advances under the loan agreement after December 8, 2023.
Advances under the loan agreement bear interest at the rate of 9.5% per annum and may be repaid at any time without penalty or premium.
A total of $4.6 million was advanced under the loan agreement and was exchanged for a senior secured convertible promissory note with
Ault & Company (see Note 27).
In August 2023, Ault & Company assumed
$11.6 million of secured promissory notes previously issued by the Company for which the Company has issued term notes to Ault & Company
in the same amount. One term note has a principal amount of $1.1 million and bears interest at 12% and the second term note has a principal
amount of $10.5 million and bears interest at 10%. These assumed loans were exchanged for a senior secured convertible promissory note
with Ault & Company (see Note 27).
Summary of interest expense, related party,
recorded within interest expense on the consolidated statement of operations:
|
Schedule of interest expense, related party | |
| | |
|
| |
For the Year Ended | | |
|
| |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Interest expense, related party | |
$ | 22,000 | | |
$ | - | | |
**26. CONVERTIBLE NOTES PAYABLE**
Convertible notes payable at December 31,
2024 and 2023, were comprised of the following:
|
Schedule of convertible notes payable | |
| |
| |
| |
| |
| | | |
| | | |
|
| |
Conversion price per share | |
Interest rate | |
Effective rate(1) | |
Due date | |
December 31, 2024 | | |
December 31, 2023 | | |
|
Convertible promissory note OID only, in default | |
90% of 5-day VWAP | |
OID Only | |
33.1% | |
September 28, 2024 | |
$ | 393,000 | | |
$ | 1,673,000 | | |
|
10% OID convertible promissory note, in default | |
$5.80 | |
15% | |
39.5% | |
October 19, 2024 | |
| 5,020,000 | | |
| - | | |
|
AVLP convertible promissory notes, principal | |
$0.35 (AVLP stock) | |
7% | |
8.9% | |
August 22, 2025 | |
| 9,911,000 | | |
| 9,911,000 | | |
|
ROI senior secured convertible note, in default | |
$0.11 (ROI stock) | |
OID Only | |
26.6% | |
April 27, 2024 | |
| 4,245,000 | | |
| 6,513,000 | | |
|
Fair value of embedded conversion options | |
| |
| |
| |
| |
| - | | |
| 910,000 | | |
|
Total convertible notes payable | |
| |
| |
| |
| |
| 19,569,000 | | |
| 19,007,000 | | |
|
Less: unamortized debt discounts | |
| |
| |
| |
| |
| - | | |
| (2,179,000 | ) | |
|
Total convertible notes payable, net of financing cost, long term | |
| |
| |
| |
| |
$ | 19,569,000 | | |
$ | 16,828,000 | | |
|
Less: current portion | |
| |
| |
| |
| |
| (19,569,000 | ) | |
| (7,375,000 | ) | |
|
Convertible notes payable, net of financing cost long-term portion | |
| |
| |
| |
| |
$ | - | | |
$ | 9,453,000 | | |
|
(1) | Includes forbearance and extension fees and OID costs that are amortized to interest expense over the
life of the notes. | |
| | F-39 | | |
| | |
**10% OID Convertible Promissory Note**
On July 18, 2024, the Company entered into
a note purchase agreement (the Purchase Agreement) with an institutional investor (the Investor) pursuant
to which the Investor purchased from the Company, on July 19, 2024, in a registered direct offering, a $5.4million10%OID
Convertible Promissory Note (the Note). The Note was sold to the Investor for a purchase price of $4.9million, which
included an OID of $0.5million. The Note accrues interest at the rate of 15%. The Note matured onOctober 19, 2024 and is in
default as of October 20, 2024. The Note is convertible into shares of Class A common stock at a conversion price of $5.80per share.
During the year ended December 31, 2024,
the Investor converted $1.2 million of the Note into 0.2 million shares of Class A common stock that had a fair value of $1.5 million
at the time of conversion and the Company recognized a $0.3 million loss on extinguishment of debt.
In December 2024, the Company and the Investor
entered into a forbearance agreement pursuant to which the Investor agreed to forebear through the close of business on December 31, 2024,
from exercising the rights and remedies it is entitled in consideration for the Companys agreement to issue a convertible promissory
note in the amount of $0.9 million (the Forbearance Note).
In February 2025, the Company and the Investor
entered into an amended and restated forbearance agreement pursuant to which the Investor agreed to forebear through the close of business
on May 15, 2025, from exercising the rights and remedies it is entitled in consideration for the Companys agreement to issue to
the Investor an amended and restated convertible promissory note in the amount of $3.5 million (the A&R Forbearance Note),
consisting of (i) the amount then due under the Forbearance Note of $0.9million, (ii) a forbearance extension fee of $0.3 million
and (iii) a true-up amount of $2.3 million. Subject to the approval by the NYSE and the Companys stockholders, the A&R Forbearance
Note is convertible into shares of Class A common stock at a conversion price equal to $2.00, subject to adjustment. The A&R Forbearance
Note accrues interest at the rate of 18% per annum and matures on May 15, 2025.
**6% Convertible Promissory Notes**
On March 11, 2024, the Company entered into
a note purchase agreement with two institutional investors pursuant to which the investors agreed to acquire, and the Company agreed to
issue and sell in a registered direct offering to the investors an aggregate of $2.0million convertible promissory notes, bearing
interest of6%. The convertible promissory notes were converted into shares of Class A common stock in May 2024 at a conversion price
of $12.25per share and the Company recognized a $0.7 million loss on extinguishment of debt.
**ROI Gain on Extinguishment of Senior Secured Convertible
Notes**
During the year ended December 31, 2024,
ROI converted $2.3 million of ROI senior secured convertible notes that had a fair value of $0.9 million at the time of conversion and
recognized a $1.4 million gain on extinguishment of debt.
**Contractual Maturities**
Principal maturities of the Companys
convertible notes payable, assuming the exercise of all extensions that are exercisable solely at the Companys option, as of December
31, 2024, were:
|
Schedule of contractual maturities | |
| | | |
|
Year | |
Principal | | |
|
2025 | |
$ | 19,569,000 | | |
|
| |
$ | 19,569,000 | | |
**27. SENIOR SECURED CONVERTIBLE NOTE, RELATED PARTY**
On October 13, 2023 (the A&C
Closing Date), the Company entered into a note purchase agreement with Ault & Company, pursuant to which the Company sold to
Ault & Company (i) a senior secured convertible promissory note in the principal face amount of $17.5 million (the 2023 Note)
and warrants (the Warrants) to purchase shares of the Companys common stock for a total purchase price of up to $17.5
million.
The purchase price was comprised of the
following: (i) cancellation of $4.6 million of cash loaned by Ault & Company to the Company since June 8, 2023 pursuant to the loan
agreement; (ii) cancellation of $11.6 million of term loans made by the Company to Ault & Company in exchange for Ault & Company
assuming liability for the payment of $11.6 million of secured notes; and (iii) the retirement of $1.25 million stated value of 125,000
shares of the Companys Series B Convertible Preferred Stock (representing all shares issued and outstanding of that series) being
transferred from Ault & Company to the Company.
| | F-40 | | |
| | |
The 2023 Note had a principal face amount
of $17.5 million and had a maturity date of October 12, 2028 (the Maturity Date). The 2023 Note bore interest at the rate
of 10% per annum. The 2023 Note was repaid in full in December 2023 and the Company recorded a $4.2 million loss on extinguishment for
the year ended December 31, 2023.
The Warrants grant Ault & Company the
right to purchase 0.1 million shares of common stock. The Warrants have a five-year term, expiring on the fifth anniversary of the A&C
Closing Date, and become exercisable on the first business day after the six-month anniversary of the A&C Closing Date. The exercise
price of the Warrants is $160.74, which is subject to adjustment in the event of customary stock splits, stock dividends, combinations
or similar events.
The Company elected the fair value option
and utilized a Monte-Carlo simulation at inception to value the 2023 Note. The Monte-Carlo simulation is calculated as the average present
value over all simulated paths. The key inputs and assumptions used in the Monte-Carlo Simulation, including volatility, estimated market
yield, risk-free rate, the probability of various scenarios, including held to maturity and subsequent preferred stock offering and various
simulated paths, were utilized to estimate the fair value at $17.8 million or approximately the principal amount outstanding as of inception.
The value of the 2023 Note was calculated as the average present value over 25,000 simulated paths. Given the 2023 Note was fully satisfied
in connection with issuance of the Series C Preferred Stock, the Company calculated the fair value on the date of extinguishment as the
total principal plus accrued interest outstanding.
The following table summarizes some of the
significant inputs and assumptions used in the Monte-Carlo simulation:
|
Schedule of senior secured convertible promissory note assumptions | |
| |
|
2023 Note | |
Amounts | |
|
Principal outstanding at valuation date | |
$17.5 million | |
|
Volatility | |
80% | |
|
Interest rate | |
10.0% | |
|
Risk-free interest rate range | |
4.7% to 5.6% | |
|
Estimated yield | |
19.5% to 21.0% | |
The Company computed the fair value of the
warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount in the amount of $4.2
million based on the estimated fair value of the Warrants.
In addition to a 21% discount for lack of
marketability, significant inputs associated with the calculation of the fair value of the Warrants included the following:
|
Schedule of convertible note | |
| |
|
Contractual term in years | |
5.0 | |
|
Volatility | |
167.3% | |
|
Dividend yield | |
0% | |
|
Risk-free interest rate | |
4.7% | |
The rollforward of the 2023 Note is as follows:
|
Schedule of senior secured convertible promissory note | |
| | | |
|
2023 Note | |
Total | | |
|
Balance as of December 31, 2022 | |
$ | - | | |
|
Exchange of loan agreement with Ault & Company | |
| 4,625,000 | | |
|
Ault & Company note from exchange of 12% demand promissory note | |
| 1,100,000 | | |
|
Ault & Company note from exchange of 10% demand promissory note | |
| 10,545,000 | | |
|
Exchange of Series B convertible preferred stock | |
| 1,250,000 | | |
|
Cash payments of senior secured convertible promissory note | |
| (150,000 | ) | |
|
Payment from issuance of Series C Preferred Stock | |
| (17,370,000 | ) | |
|
Balance as of December 31, 2023 | |
$ | - | | |
**28. COMMITMENTS AND CONTINGENCIES**
**Contingencies**
Litigation Matters
The Company is involved in litigation arising
from other matters in the ordinary course of business. The Company is regularly subject to claims, suits, regulatory and government investigations,
and other proceedings involving labor and employment, commercial disputes, and other matters. Such claims, suits, regulatory and government
investigations, and other proceedings could result in fines, civil penalties, or other adverse consequences.
| | F-41 | | |
| | |
Certain of these outstanding matters include
speculative, substantial or indeterminate monetary amounts. The Company records a liability when it believes that it is probable that
a loss has been incurred and the amount can be reasonably estimated. If the Company determines that a loss is reasonably possible and
the loss or range of loss can be estimated, the Company discloses the reasonably possible loss. The Company evaluates developments in
its legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible
losses disclosed, and makes adjustments as appropriate. Significant judgment is required to determine both likelihood of there being and
the estimated amount of a loss related to such matters.
**Arena Litigation**
*Arena Investors, LP (ROI Litigation)*
On May 30, 2024, Arena Investors, LP (Arena),
in its capacity as collateral agent for five noteholders, filed a Complaint (the ROI Complaint) in the Supreme Court of
the State of New York, County of New York against the Company and ROI, in action captioned *Arena Investors, LP v. Ault Alliance, Inc.
and RiskOn International, Inc.*, Index No. 652792/2024.
This litigation relates to the $4.2 million
ROI senior secured convertible note disclosed in Note 26.
The ROI Complaint asserts a cause of action
for breach of contract against the Company based on a Guaranty, dated April 27, 2023, and entered into, amongst others, the Company and
Arena, and seeks damages in the amount of in excess of $3.75 million, plus interest, attorneys fees, costs, expenses, and disbursements.
The ROI Complaint also asserts a cause of
action for breach of contract against ROI based on an alleged breach of that certain Security Agreement, dated April 27, 2023, and entered
into among ROI and Arena. In connection with this cause of action, Arena seeks, among other things, costs and expenses from the Company
and ROI.
On July 31, 2024, the Company and ROI filed
a motion to dismiss seeking to partially dismiss the ROI Complaint, as against the Company, and to dismiss the ROI Compliant, in its entirety,
as against ROI.
On or about January 21, 2025, the Court
entered an order denying the part of the motion which sought partial dismissal of the ROI Complaint, as against Company, and granting
the part of the motion which sought dismissal of the ROI Complaint, in its entirety, as against ROI.
On February 18, 2025, the Company filed
an Answer to the ROI Complaint and asserted numerous affirmative defenses.
Based on the Companys assessment
of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company cannot reasonably
estimate the potential loss or range of loss that may result from this action. Notwithstanding, the Company has recorded the unpaid portion
of the notes. An unfavorable outcome may have a material adverse effect on the Companys business, financial condition and results
of operations.
**Other Litigation Matters**
With respect to the Companys other
outstanding matters, based on the Companys current knowledge, the Company believes that the amount or range of reasonably possible
loss will not, either individually or in aggregate, have a material adverse effect on the Companys business, consolidated financial
position, results of operations, or cash flows. However, the outcome of such matters is inherently unpredictable and subject to significant
uncertainties.
The Company had accrued loss contingencies
related to litigation matters of $2.3 million as of December 31, 2024 and 2023.
**29. STOCKHOLDERS EQUITY**
**Class A Common Stock**
Class A common stock confers upon the holders
the rights to receive notice to participate and vote at any meeting of stockholders of the Company, to receive dividends, if and when
declared, and to participate in a distribution of surplus of assets upon liquidation of the Company.
| | F-42 | | |
| | |
**Class B Common Stock**
The Class B common stock is identical to
the Class A common stock, with the exception that each share thereof carries 10 times the voting power of a share of Class A common stock.
The Class B common stock is convertible at any time into Class A common stock on a one-for-one basis.
Distribution of Class B Common Stock to Class A Common and
Series C Preferred Stockholders
On November 15, 2024, the Company announced
the distribution of 5.0 million shares of its Class B common stock to all holders of its Class A common stock and Series C Convertible
Preferred Stock on an as-converted basis. The record date for this dividend was November 29, 2024, and the payment date was December 16,
2024.
**Preferred Stock**
Preferred stock as of December 31, 2024
consisted of the following:
|
Stockholders equity | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| |
Par Value Per Share | | |
Stated Value Per Share | | |
Shares Authorized | | |
Liquidation Preference | | |
Shares Issued and Outstanding at December 31, 2024 | | |
|
Series A Convertible Preferred Stock | |
$ | 0.001 | | |
$ | 25 | | |
| 1,000,000 | | |
$ | 176,000 | | |
| 7,040 | | |
|
Series C Convertible Preferred Stock | |
$ | 0.001 | | |
$ | 1,000 | | |
| 75,000 | | |
| 50,000,000 | | |
| 50,000 | | |
|
Series D Cumulative Redeemable Perpetual Preferred Stock | |
$ | 0.001 | | |
$ | 25 | | |
| 2,000,000 | | |
| 8,096,000 | | |
| 323,835 | | |
|
Series E Redeemable Perpetual Preferred Stock | |
$ | 0.001 | | |
$ | 25 | | |
| 2,500,000 | | |
| 16,250,000 | | |
| 649,998 | | |
|
Series F Exchangeable Preferred Stock | |
$ | 0.001 | | |
$ | 1,000 | | |
| 1,000,000 | | |
| 999,000 | | |
| 998,577 | | |
|
Series G Convertible Preferred Stock | |
$ | 0.001 | | |
$ | 1,000 | | |
| 25,000 | | |
| - | | |
| - | | |
|
Unallocated | |
| | | |
| | | |
| 18,400,000 | | |
| | | |
| | | |
|
Total | |
| | | |
| | | |
| 25,000,000 | | |
$ | 75,521,000 | | |
| 2,029,450 | | |
Preferred stock as of December 31, 2023
consisted of the following:
|
| |
Par Value Per Share | | |
Stated Value Per Share | | |
Shares Authorized | | |
Liquidation Preference | | |
Shares Issued and Outstanding at December 31, 2023 | | |
|
Series A Convertible Preferred Stock | |
$ | 0.001 | | |
$ | 25 | | |
| 1,000,000 | | |
$ | 176,000 | | |
| 7,040 | | |
|
Series C Convertible Preferred Stock | |
$ | 0.001 | | |
$ | 1,000 | | |
| 75,000 | | |
| 41,500,000 | | |
| 41,500 | | |
|
Series D Cumulative Redeemable Perpetual Preferred Stock | |
$ | 0.001 | | |
$ | 25 | | |
| 2,000,000 | | |
| 10,630,000 | | |
| 425,197 | | |
|
Unallocated | |
| | | |
| | | |
| 21,925,000 | | |
| | | |
| | | |
|
Total | |
| | | |
| | | |
| 25,000,000 | | |
$ | 52,306,000 | | |
| 473,737 | | |
The Company is authorized to issue 25.0
million shares of preferred stock, $0.001 par value. As of December 31, 2024, the rights, preferences, privileges and restrictions on
the remaining authorized 18.4 million shares of preferred stock have not been determined. The Board is authorized to designate a new series
of preferred shares and determine the number of shares, as well as the rights, preferences, privileges and restrictions granted to or
imposed upon any series of preferred shares.
*10.00% Series E Cumulative Redeemable Perpetual Preferred
Stock (the Series E Preferred Stock)*
On November 11, 2024 the Company filed a
Certificate of Designation, Rights and Preferences (the Certificate of Designation) with the Secretary of State of the State
of Delaware to establish the preferences, voting powers, limitations as to dividends or other distributions, qualifications, terms and
conditions of redemption and other terms and conditions of the Companys Series E Preferred Stock. The following is a summary description
of those terms and the general effect of the issuance of the shares of Series E Preferred Stock on the Companys other classes of
registered securities.
The Series E Preferred Stock will, as to
dividend rights and rights as to the distribution of assets upon the Companys liquidation, dissolution or winding-up, rank: (1)
senior to all classes or series of Common Stock and to all other equity securities issued by the Company other than equity securities
referred to in clauses (2) and (3); (2) on parity with any future class or series of the Companys equity securities expressly designated
as ranking on parity with the Series E Preferred Stock, (3) junior to the Companys Series A Cumulative Redeemable Perpetual Preferred
Stock and its Series C Convertible Preferred Stock; and all equity securities issued by the Company expressly designated as ranking senior
to the Series E Preferred Stock; and (4) junior to all the Companys existing and future indebtedness.
| | F-43 | | |
| | |
To the extent the shares of Series E Preferred
Stock are issued, the Company will pay cumulative cash dividends on the Series E Preferred Stock when, as and if declared by its board
of directors (or a duly authorized committee of its board of directors), only out of funds legally available for payment of dividends.
Dividends on the Series E Preferred Stock will accrue on the stated amount of $25.00 per share of the Series E Preferred Stock at a rate
per annum equal to 10.00% (equivalent to $3.00 per year), payable monthly in arrears.
The Series E Preferred Stock is redeemable
by the Company. Holders of shares of the Series E Preferred Stock generally will have no voting rights, except as required by law and
as provided in the Certificate of Designation. Voting rights for holders of the Series E Preferred Stock exist primarily with respect
to material and adverse changes in the terms of the Series E Preferred Stock and the creation of additional classes or series of preferred
stock that rank senior to the Series E Preferred Stock.
Distribution of Series E Preferred Stock to Class A Common
and Series C Preferred Stockholders
On November 13, 2024, the Company announced
the distribution of 0.7 million shares of its Series E Preferred Stock, a $16.3 million stated value, to holders of Class A common stock
and Series C preferred stock on an as-converted basis. The record date for this dividend was November 26, 2024, and the payment date was
December 9, 2024.
*Series F Preferred Stock*
On November 22, 2024, the Company filed
a Certificate of Designation, Rights and Preferences with the Secretary of State of the State of Delaware to establish the preferences,
voting powers, limitations as to dividends or other distributions, qualifications, terms and conditions of redemption and other terms
and conditions of the Companys Series F Exchangeable Preferred Stock (the Series F Preferred Stock). The following
is a summary description of those terms and the general effect of the issuance of the shares of Series F Preferred Stock on the Companys
other classes of registered securities.
There are 1.0 million shares of the Series
F Preferred Stock designated.
Each share of Series F Preferred Stock is
exchangeable, at the option of its holder, into (i) 10 shares of Class A Common Stock of Ault Capital Group, Inc., a Nevada corporation
and currently a wholly owned subsidiary of the Company (ACG) and (ii) five shares of Class B Common Stock of ACG at any
time beginning on the later of (i) one year after issuance of the Series F Preferred Stock and (ii) the date of the registration under
the Securities Act of all of the shares of Ault Class A Common Stock and Ault Class B Common Stock issuable upon the Exchange of the Series
F Preferred Stock.
The Series F Preferred Stock will, as to
rights as to the distribution of assets upon the Companys liquidation, dissolution or winding-up, rank: (1) senior to all classes
or series of Common Stock and to all other equity securities issued by the Company other than equity securities referred to in clauses
(2) and (3); (2) on parity with any future class or series of the Companys equity securities expressly designated as ranking on
parity with the Series F Preferred Stock, (3) junior to the Companys Series A Cumulative Redeemable Perpetual Preferred Stock,
Series C Convertible Preferred Stock, Series D Preferred Stock and Series E Cumulative Redeemable Perpetual Preferred Stock; and all equity
securities issued by the Company expressly designated as ranking senior to the Series F Preferred Stock; and (4) junior to all the Companys
existing and future indebtedness.
Distribution of Series F Preferred Stock to Class A Common
and Series C Preferred Stockholders
On November 26, 2024, the Company announced
the distribution of 1.0 million shares of its Series F Exchangeable Preferred Stock to holders of its Class A Common Stock and Series
C Convertible Preferred Stock. The record date for this dividend was December13, 2024, and the payment date was December 23, 2024.
*Series G Convertible Preferred Stock*
On December 21, 2024, the Company filed
a Certificate of Designation (the Series G Certificate of Designation), which was amended on February 5, 2025, with the
Secretary of State of Delaware to establish the rights and preferences of the Series G Convertible Preferred Stock (the Series
G Preferred Stock). Each share has a stated value of $1,000.00 and is convertible into shares of Class A common stock at a conversion
price equal to the greater of (i) $0.10 per share or (ii) the lesser of (A) $6.74 or (B) 105% of the volume weighted average price for
the ten trading days prior to conversion. The conversion price is subject to adjustments for certain dilutive events.
Holders of Series G Preferred Stock vote
with common stockholders on an as-converted basis, subject to a voting floor price of $6.244 (as amended from $5.38). The stock ranks
senior to Series A, D, E, and F Preferred Stock in liquidation but is on parity with Series C Preferred Stock.
| | F-44 | | |
| | |
Series G Preferred Stock stockholders receive
cumulative cash dividends at an annual rate of 9.5% ($95.00 per share), payable monthly. For the first two years, the Company may elect
to pay dividends in Class A common stock at the conversion price. If dividends are in arrears, the rate increases to 12% per annum, payable
in cash, additional Series G Preferred Stock, or, if applicable, freely tradeable Class A common stock.
In the event of liquidation, holders receive
the stated value before distributions to junior classes. A change of control is treated as a liquidation event.
Series G Preferred Stock Sales Agreement with Ault &
Company
On December 21, 2024, the Company entered
into a Securities Purchase Agreement (the Agreement) with Ault & Company pursuant to which the Company agreed to sell
to Ault & Company up to 25,000 shares of Series G Preferred Stock and warrants (the Series G Warrants) to purchase shares
of Class A common stock for a total purchase price of up to $25.0 million. There were no sales under the Agreement during the year ended
December 31, 2024.
At closing, the Company will issue the Purchaser
the Series G Warrants, which grant Ault & Company the right to purchase a specified number of shares of Class A common stock (the
Warrant Shares). The exercise price of the Series G Warrants is $5.92 (the Exercise Price) and the number
of Warrant Shares is 4.2 million, which is the figure derived by dividing the actual investment amount by the Exercise Price. The Exercise
Price is subject to adjustment in the event of customary stock splits, stock dividends, combinations or similar events.
The Series G Warrants have a five-year term,
expiring on the fifth anniversary of issuance, and become exercisable on the first business day after the six-month anniversary of issuance.
Between January and April 2025, the
Company sold to Ault & Company an aggregate of 960 shares of Series G Convertible Preferred Stock and Series G Warrants to
purchase 0.2 million shares of Class A common stock, for a purchase price of $1.0
million.
*Series C Convertible Preferred Stock*
On December 14, 2023, pursuant to the securities
purchase agreement the Company entered into with Ault & Company, dated as of November 6, 2023, the Company sold to Ault & Company,
in three separate closings that occurred on the closing date, an aggregate of 41,500 shares of Series C Preferred Stock and warrants (the
Series C Warrants) to purchase 0.4 million shares of Class A common stock, for a total purchase price of $41.5 million.
The proceeds from the sale of Series C Preferred
Stock were used in part to pay $17.5 million to satisfy the outstanding balance on the outstanding senior secured convertible promissory
note with Ault & Company. The senior secured convertible promissory note with Ault & Company had an unamortized debt discount
of $4.2 million outstanding, which was recorded as a loss on extinguishment of debt.
In addition, the Company paid $20.4 million
to pay the $20.2 million outstanding balance of the 8% senior secured promissory notes, plus $0.2 million accrued interest payable. The
8% senior secured promissory notes had an unamortized debt discount of $3.2 million outstanding, which was recorded as a loss on extinguishment
of debt.
On December 14, 2023, the Company, along
with its wholly owned subsidiaries Sentinum, Third Avenue, ACS, BNI Montana, Ault Lending, Ault Aviation, LLC (Ault Aviation)
and AGREE (collectively with the Company, Sentinum, Third Avenue, ACS, BNI Montana, Ault Lending and Ault Aviation, the Guarantors)
entered into a Loan and Guaranty Agreement (the Loan Agreement) with institutional lenders, pursuant to which Ault &
Company borrowed $36 million and issued secured promissory notes to the lenders in the aggregate amount of $38.9 million (collectively,
the Secured Notes; and the transaction, the Loan).
Pursuant to the Loan Agreement, the Guarantors,
as well as Milton C. Ault, III, the Companys Executive Chairman and the Chief Executive Officer of Ault & Company, agreed to
act as guarantors for repayment of the Secured Notes. In addition, certain Guarantors entered into various agreements as collateral in
support of the guarantee of the Secured Notes, including (i) a security agreement by Sentinum, pursuant to which Sentinum granted to the
Lenders a security interest in (a) 19,226 Antminers (the Miners), (b) all of the digital currency mined or otherwise generated
from the Miners and (c) the membership interests of ACS, (ii) a security agreement by the Company, Ault Lending, BNI Montana and AGREE,
pursuant to which those entities granted to the lenders a security interest in substantially all of their assets, as well as a pledge
of equity interests in Ault Aviation, AGREE, Sentinum, Third Avenue, Ault Energy, LLC, the Companys wholly owned subsidiary, Ault
Disruptive, Eco Pack Technologies, Inc., the Companys wholly owned subsidiary, and Circle 8 Holdco, (iii) a mortgage and security
agreement by Third Avenue on the Florida Property, (iv) a future advance mortgage by ACS on the real estate property owned by ACS in Dowagiac,
Michigan (the Michigan Property), (v) an aircraft mortgage and security agreement by Ault Aviation on a private aircraft
owned by Ault Aviation (the Aircraft), and (vi) deposit account control agreements over certain bank accounts held by certain
of the Companys subsidiaries.
| | F-45 | | |
| | |
In addition, pursuant to the Loan Agreement,
the Company agreed to establish a segregated deposit account (the Segregated Account), which would be used as a further
guarantee of repayment of the Secured Notes. $3.5 million of cash was paid into the Segregated Account on the closing date. The Company
was required to have the minimum balance in the Segregated Account be not less than $7 million, $15 million, $20 million and $27.5 million
on the four-month, nine-month, one-year and two-year anniversaries of the closing date, respectively. In addition, starting on March 31,
2024, the Company was required to deposit $0.3 million monthly into the Segregated Account, which increased to $0.4 million monthly starting
March 31, 2025. Further, the Company agreed to deposit into the Segregated Account, (i) up to the first $7 million of net proceeds, if
any, from the sale of the Hilton Garden Inn in Madison West, the Residence Inn in Madison West, the Courtyard in Madison West, and the
Hilton Garden Inn in Rockford; (ii) 50% of cash dividends (on a per dividend basis) received from Circle 8 on or after June 30, 2024;
(iii) 30% of the net proceeds from any bond offerings the Company conducts, which shall not exceed $9 million in the aggregate; and (iv)
25% of the net proceeds from cash flows, collections and revenues from loans or other investments made by Ault Lending (including but
not limited to sales of loans or investments, dividends, interest payments and amortization payments), which shall not exceed $5 million
in the aggregate. In addition, if the Company decides to sell certain assets, the Company further agreed to deposit funds into the Segregated
Account from the sale of those assets, including, (i) $15 million from the sale of the Florida Property, (ii) $11 million from the sale
of the Aircraft, (iii) $17 million from the sale of the Michigan Property, (iv) $350 per Miner, subject to a de minimis threshold of $1
million, and (v) $10 million from the sale of Circle 8.
Pursuant to the Companys financial
guarantee obligations noted above, the Company recorded a guarantee liability of $38.9million using the practical expedient to fair
value as set forth in ASC 460-10-30-2(a) and recorded an expense of $35.4 million (the amount of the guarantee liability, less the $3.5
million restricted cash in the Segregated Account) within other income (expense) on the consolidated statement of operations and comprehensive
loss for the year ended December 31, 2023.
The guarantee written by the Company represents
a variable interest in Ault & Company. Ault & Company, founded in 2015, is a private holding company focused on acquiring undervalued
assets and disruptive technologies within the commercial, defense, aerospace, industrial, hospitality, technology and real estate sectors.
Mr. Ault is the Founder and Executive Chairman of its Board of Directors. Ault & Company has demonstrated its ability to raise capital
independently, on a limited basis, however given the nature of its strategic investment policy, there is no requirement for it to raise
additional capital until and unless a strategic opportunity presents itself that requires additional capital. The nature and amount of
the financing that the Company guaranteed indicates that Ault & Companys lender required the Companys collateral and
support to close the December 2023 financing.
The accounting guidance requires the Company
to perform an analysis to determine whether its variable interest gives it a controlling financial interest in Ault & Company. The
Company performed a VIE analysis and determined that given the control structure and ownership of Ault & Company that the Company
would not be able to remove the key operating decision maker, Mr. Ault, from his leadership role at Ault & Company and therefore the
Company does not meet the power criterion to be considered the primary beneficiary of Ault & Company.
During the year ended December 31, 2024,
the Company sold to Ault & Company an aggregate of 8,500 shares of Series C Preferred Stock and Warrants to purchase 0.1 million shares
of Class A common stock, for a total purchase price of $8.5 million, respectively.
Amendments to Loan and Guarantee Agreement
On September 17, 2024, the loan and guarantee
agreement, dated as of December 14, 2023, as amended, pursuant to which the Company has guaranteed financial obligations of Ault &
Company borrowings, was amended regarding the Companys obligations to fund the restricted cash Segregated Account.
The Company agreed to deposit in the Segregated
Account: (i) $0.4 million monthly commencing on September30, 2024 and ending on February 28, 2025; and (ii) $0.5 million monthly
commencing on March 31, 2025 and ending on the earlier of the term loan maturity date, prepayment of the term loan in full or the date
on which the balance of the Segregated Account exceeds 110% of the outstanding balance of the term loan. As of December 31, 2024, the
Company had deposited $18.4 million in the Segregated Account.
On March 7, 2025 the loan and guarantee
agreement, dated as of December 14, 2023, as amended, pursuant to which the Company has guaranteed financial obligations of Ault &
Company borrowings, was further amended regarding the Companys obligations to fund the restricted cash Segregated Account.
| | F-46 | | |
| | |
Pursuant to the March 7, 2025 amendment,
the Company agreed to deposit in the Segregated Account: (i) $0.2 million monthly commencing on April11, 2025 and ending on June
11, 2025; and (ii) $0.4 million monthly commencing on July 11, 2025 and ending on the earlier of the term loan maturity date, prepayment
of the term loan in full or the date on which the balance of the Segregated Account exceeds 110% of the outstanding balance of the term
loan.
**Common ATM Offering**
During the year ended December 31, 2024,
the Company sold an aggregate of 0.7 million shares of Class A common stock pursuant to the At-The-Market issuance sales agreement, as
amended, entered into with Ascendiant Capital Markets, LLC in 2023 (the 2023 Common ATM Offering) for gross proceeds of
$14.6 million.
**ELOC Purchase Agreement**
On June 20, 2024, the Company entered into
a purchase agreement, as amended on November 1, 2024 (the ELOC Purchase Agreement) with Orion Equity Partners, LLC (Orion),
which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company has the right to direct
Orion to purchase up to an aggregate of $37.5 million of shares of Series D Preferred Stock over the 36-month term of the ELOC Purchase
Agreement at a purchase price equal to 94.5% of the average closing stock price during the seven consecutive trading days immediately
preceding a given purchase date.
The ELOC Purchase Agreement may be terminated
by the Company at any time after commencement, at its discretion, provided that at the time of termination, the Company does not have
any outstanding amounts owed to the Lenders, who are affiliates of Orion, pursuant to the Credit Agreement.
During the year ended December 31, 2024,
there were no purchases under the ELOC Purchase Agreement.
**30. INCOME TAXES**
The following is a geographical breakdown
of income/loss from continuing operations before the provision for income tax, for the years ended December 31, 2024 and 2023:
|
Schedule of income loss before the provision for income tax | |
| | | |
| | | |
|
| |
2024 | | |
2023 | | |
|
Pre-tax loss | |
| | |
| | |
|
U.S. Federal | |
$ | (58,979,000 | ) | |
$ | (240,483,000 | ) | |
|
Foreign | |
| (2,724,000 | ) | |
| (83,000 | ) | |
|
Total | |
$ | (61,703,000 | ) | |
$ | (240,566,000 | ) | |
Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax
purposes. Significant components of the Companys deferred tax assets are as follows:
|
Schedule of deferred tax assets | |
| | | |
| | | |
|
| |
2024 | | |
2023 | | |
|
Deferred tax asset: | |
| | |
| | |
|
Allowance for doubtful accounts | |
$ | 502,000 | | |
$ | 314,000 | | |
|
Unrealized losses | |
| 14,603,000 | | |
| 13,172,000 | | |
|
Obsolete inventory | |
| - | | |
| 351,000 | | |
|
Stock compensation | |
| 4,192,000 | | |
| 13,383,000 | | |
|
Other carryforwards | |
| - | | |
| - | | |
|
Net operating loss carryforwards | |
| 55,001,000 | | |
| 86,565,000 | | |
|
Lease liability | |
| 790,000 | | |
| 770,000 | | |
|
Impairment | |
| 32,626,000 | | |
| 29,701,000 | | |
|
Accrued expenses | |
| 1,823,000 | | |
| 2,228,000 | | |
|
Interest expense | |
| 16,293,000 | | |
| 14,713,000 | | |
|
Outside basis difference | |
| 3,325,000 | | |
| 9,308,000 | | |
|
Intangible assets, net | |
| 9,000 | | |
| 50,000 | | |
|
Other | |
| 1,563,000 | | |
| 1,356,000 | | |
|
Total deferred tax asset | |
| 130,727,000 | | |
| 171,911,000 | | |
|
| |
| | | |
| | | |
|
Deferred tax liability: | |
| | | |
| | | |
|
Right-of-use assets | |
| (734,000 | ) | |
| (678,000 | ) | |
|
Fixed assets, net | |
| (15,514,000 | ) | |
| (15,226,000 | ) | |
|
Total deferred income tax liabilities | |
| (16,248,000 | ) | |
| (15,904,000 | ) | |
|
| |
| | | |
| | | |
|
Net deferred income tax assets | |
| 114,479,000 | | |
| 156,007,000 | | |
|
Valuation allowance | |
$ | (114,479,000 | ) | |
$ | (156,007,000 | ) | |
|
Deferred tax asset (liability), net | |
$ | - | | |
$ | - | | |
| | F-47 | | |
| | |
At
December 31, 2024, the Company had federal net operating loss carryforwards (NOLs) for income tax purposes of approximately
$191.9 million related to the years after December 31, 2017 that do not have an expiration under current tax law and $8.2million related to the
years before January 1, 2018 subject to expiration after application of limitation set forth in Section 382 of the Internal Revenue Code
(382). The Company had state NOLs for income tax purposes of approximately $238.2 million as of December 31, 2024.
The state NOLs may be used to offset future taxable income and will begin to expire in 2029, unless previously utilized. In accordance
with 382, future utilization of the Companys NOLs is subject to an annual
limitation as a result of ownership changes that occurred previously. The Company also maintains NOLs in various foreign jurisdictions.
In assessing the realization of deferred
tax assets, management considers whether it is more likely than not some portion or all deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax
assets, projected future taxable income and tax planning strategies in making this assessment. After consideration of all positive and
negative evidence, including the Companys generation of NOLs in current and prior periods, there is substantial doubt regarding
the Companys ability to utilize its deferred tax assets, therefore, the Company recorded a full valuation allowance. For the year
ended December 31, 2024, the valuation allowance decreased by $41.5million.
The net income tax provision (benefit) on continuing
operations consisted of the following:
|
Schedule of reconciliation of income tax attributable to operations | |
| | | |
| | | |
|
| |
2024 | | |
2023 | | |
|
Current | |
| | |
| | |
|
U.S. Federal | |
$ | 51,000 | | |
$ | 424,000 | | |
|
U.S. State | |
| 5,000 | | |
| (103,000 | ) | |
|
Foreign | |
| - | | |
| - | | |
|
Total current provision | |
| 56,000 | | |
| 321,000 | | |
|
Deferred | |
| | | |
| | | |
|
U.S. Federal | |
| - | | |
| - | | |
|
U.S. State | |
| - | | |
| 27,000 | | |
|
Foreign | |
| - | | |
| - | | |
|
Total deferred provision | |
| - | | |
| 27,000 | | |
|
Total provision for income taxes | |
$ | 56,000 | | |
$ | 348,000 | | |
The Companys effective tax rates
were (0.1)% and (0.1)% for the years ended December 31, 2024 and 2023, respectively. During the year ended December 31, 2024, the effective
tax rate differed from the U.S. federal statutory rate primarily due to the change in valuation allowance. The reconciliation of income
tax attributable to operations computed at U.S. Federal statutory income tax rates of 21% to income tax expense is as follows:
|
Schedule of effective income tax rate reconciliation | |
| | | |
| | | |
|
| |
2024 | | |
2023 | | |
|
Expected federal income tax benefit | |
| 21.0 | % | |
| 21.0 | % | |
|
State taxes net of federal benefit | |
| 8.2 | % | |
| -1.5 | % | |
|
Effect of change in valuation allowance | |
| 79.6 | % | |
| -19.1 | % | |
|
Permanent differences | |
| 2.6 | % | |
| 1.4 | % | |
|
Goodwill impairment | |
| - | | |
| -2.2 | % | |
|
IRC Section 162(m) compensation limitation | |
| - | | |
| 0.0 | % | |
|
Excess tax benefit - windfall/(shortfall) | |
| - | | |
| -0.3 | % | |
|
Deconsolidation adjustments | |
| -110.5 | % | |
| - | | |
|
Foreign rate differential | |
| 0.1 | % | |
| - | | |
|
Other | |
| -1.1 | % | |
| 0.5 | % | |
|
Income tax benefit | |
| -0.1 | % | |
| -0.1 | % | |
| | F-48 | | |
| | |
The Company accounts for uncertain tax positions
in accordance with ASC 740-10-25. ASC 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed
on a tax return should be recorded in the financial statements. Under ASC 740-10-25, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater
than fifty percent likely of being realized upon ultimate settlement. To the extent that the final tax outcome of these matters is different
than the amount recorded, such differences impact income tax expense in the period in which such determination is made. Interest and penalties,
if any, related to accrued liabilities for potential tax assessments are included in income tax expense. ASC 740-10-25 also requires management
to evaluate tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions that more likely
than not would not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated tax positions
taken by the Company and has concluded that as of December 31, 2024 and 2023, there are no uncertain tax positions taken, or expected
to be taken, that would require recognition of a liability that would require disclosure in the financial statements.
In general, the Companys statute
of limitations remains open for various taxable years, in various U.S. federal, U.S. state and foreign jurisdictions. However, if and
when the Company claims net operating loss carryforwards against future taxable income, those losses may be examined by taxing authorities.
The Company will perform an analysis to determine the effect, if any, of these loss limitations rules on the NOL carryforward balances.
Earnings in all foreign jurisdictions are permanently reinvested.
**31. NET LOSS PER SHARE**
Net loss per share is computed by dividing
the net loss to common stockholders by the weighted average number of Class A common shares outstanding. The calculation of the basic
and diluted earnings per share is the same for all periods presented, as the effect of the potential common stock equivalents is anti-dilutive
due to the Companys net loss position for all periods presented. Anti-dilutive securities, which are convertible into or exercisable
for Class A common stock, consisted of the following at December 31, 2024 and 2023:
|
Schedule of net loss per share | |
| | | |
| | | |
|
| |
December 31, | | |
|
| |
2024 | | |
2023 | | |
|
Convertible preferred stock | |
| 9,142,000 | | |
| 9,000 | | |
|
Class B common stock | |
| 4,999,000 | | |
| - | | |
|
Convertible notes | |
| 882,000 | | |
| 2,000 | | |
|
Warrants | |
| 477,000 | | |
| 16,000 | | |
|
Total | |
| 15,500,000 | | |
| 27,000 | | |
| | F-49 | | |
| | |
**32. SEGMENT AND CUSTOMERS INFORMATION**
The Company had the following reportable
segments as of December 31, 2024 and 2023; see Note 1 for a brief description of the Companys business. The Companys Chief
Operating Decision Maker (CODM) is its Executive Chairman, Mr. Ault. The performance measure of the Companys reportable
segments is primarily income or (loss) from operations. Income or (loss) from operations for each segment includes all revenues, cost
of revenues, gross profit and other operating expenses directly attributable to the segment. The CODM is also provided with key non-cash
expenses by segment, including depreciation and amortization, impairment of property and equipment and impairment of goodwill and intangible
assets. These financial metrics are used for evaluating the performance of each segment and making decisions about allocating capital
and other resources to each segment.
The Holding Co.
column includes financial results that are not allocated to a specific reportable segment but are primarily generated within the holding
company entity.
The following data presents the revenues,
expenditures and other operating data of the Company and its operating segments for the year ended December 31, 2024:
|
Schedule of operating segments | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| |
TurnOnGreen | | |
Fintech | | |
Sentinum | | |
AGREE | | |
Energy | | |
ROI | | |
Holding Co. | | |
Total | | |
|
Revenue | |
$ | 4,913,000 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 116,000 | | |
$ | 253,000 | | |
$ | 2,523,000 | | |
$ | 7,805,000 | | |
|
Revenue, crypto assets mining | |
| - | | |
| - | | |
| 30,598,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 30,598,000 | | |
|
Revenue, hotel and real estate operations | |
| - | | |
| - | | |
| 876,000 | | |
| 18,015,000 | | |
| - | | |
| - | | |
| - | | |
| 18,891,000 | | |
|
Revenue, crane operations | |
| - | | |
| - | | |
| - | | |
| - | | |
| 47,475,000 | | |
| - | | |
| - | | |
| 47,475,000 | | |
|
Revenue, lending and trading activities | |
| - | | |
| 1,893,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,893,000 | | |
|
Total revenue | |
| 4,913,000 | | |
| 1,893,000 | | |
| 31,474,000 | | |
| 18,015,000 | | |
| 47,591,000 | | |
| 253,000 | | |
| 2,523,000 | | |
| 106,662,000 | | |
|
Cost of revenue | |
| 2,647,000 | | |
| (1,205,000 | ) | |
| 34,338,000 | | |
| 12,928,000 | | |
| 31,411,000 | | |
| 1,086,000 | | |
| 1,240,000 | | |
| 82,445,000 | | |
|
Gross profit (loss) | |
| 2,266,000 | | |
| 3,098,000 | | |
| (2,864,000 | ) | |
| 5,087,000 | | |
| 16,180,000 | | |
| (833,000 | ) | |
| 1,283,000 | | |
| 24,217,000 | | |
|
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Research and development | |
| 1,008,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 10,003,000 | | |
| - | | |
| 11,011,000 | | |
|
Selling and marketing | |
| 1,293,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 12,726,000 | | |
| - | | |
| 14,019,000 | | |
|
General and administrative | |
| 4,038,000 | | |
| (5,556,000 | ) | |
| (746,000 | ) | |
| 4,830,000 | | |
| 16,267,000 | | |
| - | | |
| 16,412,000 | | |
| 35,245,000 | | |
|
Impairment of property and equipment | |
| - | | |
| - | | |
| 10,500,000 | | |
| 8,946,000 | | |
| - | | |
| - | | |
| - | | |
| 19,446,000 | | |
|
Impairment of goodwill and intangible assets | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,500,000 | | |
| - | | |
| - | | |
| 1,500,000 | | |
|
Total operating expenses | |
| 6,339,000 | | |
| (5,556,000 | ) | |
| 9,754,000 | | |
| 13,776,000 | | |
| 17,767,000 | | |
| 22,729,000 | | |
| 16,412,000 | | |
| 81,221,000 | | |
|
(Loss) income from operations | |
$ | (4,073,000 | ) | |
$ | 8,654,000 | | |
$ | (12,618,000 | ) | |
$ | (8,689,000 | ) | |
$ | (1,587,000 | ) | |
$ | (23,562,000 | ) | |
$ | (15,129,000 | ) | |
| (57,004,000 | ) | |
|
Other income (expense): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Interest and other income | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 2,236,000 | | |
|
Interest expense | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (19,671,000 | ) | |
|
Gain on conversion of investment in equity
securities to marketable equity securities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 17,900,000 | | |
|
Gain on extinguishment of debt | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 2,981,000 | | |
|
Loss from investment in unconsolidated entity | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (1,958,000 | ) | |
|
Impairment of equity securities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (6,266,000 | ) | |
|
Gain on the sale of fixed assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 79,000 | | |
|
Total other expense, net | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (4,699,000 | ) | |
|
Loss before income taxes | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | (61,703,000 | ) | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Depreciation and amortization expense | |
$ | 98,000 | | |
$ | - | | |
$ | 14,879,000 | | |
$ | 2,735,000 | | |
$ | 4,641,000 | | |
$ | 74,000 | | |
$ | 2,010,000 | | |
$ | 24,437,000 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Interest expense | |
$ | - | | |
$ | (97,000 | ) | |
$ | (125,000 | ) | |
$ | (6,039,000 | ) | |
$ | (2,808,000 | ) | |
$ | (3,879,000 | ) | |
$ | (6,723,000 | ) | |
$ | (19,671,000 | ) | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Capital expenditures for the year ended
December 31, 2024 | |
$ | 53,000 | | |
$ | - | | |
$ | 1,697,000 | | |
$ | 797,000 | | |
$ | 2,023,000 | | |
$ | 157,000 | | |
$ | 101,000 | | |
$ | 4,828,000 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Segment identifiable assets as of December 31,
2024 | |
$ | 3,050,000 | | |
$ | 6,676,000 | | |
$ | 35,260,000 | | |
$ | 69,130,000 | | |
$ | 45,524,000 | | |
$ | 1,130,000 | | |
$ | 59,701,000 | | |
$ | 220,471,000 | | |
| | F-50 | | |
| | |
Segment information for the year ended
December 31, 2023:
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| |
TurnOnGreen | | |
Fintech | | |
Sentinum | | |
SMC | | |
AGREE | | |
Energy | | |
ROI | | |
Holding Co. | | |
Total | | |
|
Revenue | |
$ | 4,201,000 | | |
$ | - | | |
$ | - | | |
$ | 31,557,000 | | |
$ | - | | |
$ | 899,000 | | |
$ | 305,000 | | |
$ | - | | |
$ | 36,962,000 | | |
|
Revenue, crypto assets mining | |
| - | | |
| - | | |
| 33,107,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 33,107,000 | | |
|
Revenue, hotel and real estate operations | |
| - | | |
| - | | |
| 1,416,000 | | |
| - | | |
| 16,161,000 | | |
| - | | |
| - | | |
| - | | |
| 17,577,000 | | |
|
Revenue, crane operations | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 49,198,000 | | |
| - | | |
| - | | |
| 49,198,000 | | |
|
Revenue, lending and trading activities | |
| - | | |
| (1,998,000 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,998,000 | ) | |
|
Total revenue | |
| 4,201,000 | | |
| (1,998,000 | ) | |
| 34,523,000 | | |
| 31,557,000 | | |
| 16,161,000 | | |
| 50,097,000 | | |
| 305,000 | | |
| - | | |
| 134,846,000 | | |
|
Cost of revenue | |
| 3,306,000 | | |
| 1,180,000 | | |
| 36,446,000 | | |
| 23,971,000 | | |
| 12,300,000 | | |
| 30,686,000 | | |
| 2,173,000 | | |
| - | | |
| 110,062,000 | | |
|
Gross profit (loss) | |
| 895,000 | | |
| (3,178,000 | ) | |
| (1,923,000 | ) | |
| 7,586,000 | | |
| 3,861,000 | | |
| 19,411,000 | | |
| (1,868,000 | ) | |
| - | | |
| 24,784,000 | | |
|
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Research and development | |
| 418,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 4,000,000 | | |
| - | | |
| 4,418,000 | | |
|
Selling and marketing | |
| 1,446,000 | | |
| - | | |
| - | | |
| 3,345,000 | | |
| - | | |
| - | | |
| 26,862,000 | | |
| - | | |
| 31,653,000 | | |
|
General and administrative | |
| 3,412,000 | | |
| 238,000 | | |
| 171,000 | | |
| 11,213,000 | | |
| 3,383,000 | | |
| 13,857,000 | | |
| 7,487,000 | | |
| 28,439,000 | | |
| 68,200,000 | | |
|
Impairment of property and equipment | |
| - | | |
| - | | |
| - | | |
| - | | |
| 8,284,000 | | |
| 14,025,000 | | |
| 4,136,000 | | |
| - | | |
| 26,445,000 | | |
|
Impairment of goodwill and intangible assets | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 42,880,000 | | |
| - | | |
| - | | |
| 42,880,000 | | |
|
Impairment of mined crypto assets | |
| - | | |
| - | | |
| 489,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 489,000 | | |
|
Total operating expenses | |
| 5,276,000 | | |
| 238,000 | | |
| 660,000 | | |
| 14,558,000 | | |
| 11,667,000 | | |
| 70,762,000 | | |
| 42,485,000 | | |
| 28,439,000 | | |
| 174,085,000 | | |
|
Loss from operations | |
$ | (4,381,000 | ) | |
$ | (3,416,000 | ) | |
$ | (2,583,000 | ) | |
$ | (6,972,000 | ) | |
$ | (7,806,000 | ) | |
$ | (51,351,000 | ) | |
$ | (44,353,000 | ) | |
$ | (28,439,000 | ) | |
| (149,301,000 | ) | |
|
Other income (expense): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Interest and other income | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 4,444,000 | | |
|
Interest expense | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (44,314,000 | ) | |
|
Other expense, guarantee | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (35,400,000 | ) | |
|
Loss on extinguishment of debt | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (7,322,000 | ) | |
|
Loss on extinguishment of debt, related party | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (4,164,000 | ) | |
|
Loss from investment in unconsolidated entity | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (302,000 | ) | |
|
Loss on deconsolidation of subsidiary | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (3,040,000 | ) | |
|
Impairment of equity securities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (9,555,000 | ) | |
|
Change in fair value of warrant liability | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 6,319,000 | | |
|
Gain on the sale of fixed assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 2,069,000 | | |
|
Total other expense, net | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (91,265,000 | ) | |
|
Loss before income taxes | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | (240,566,000 | ) | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Depreciation and amortization expense | |
$ | 93,000 | | |
$ | - | | |
$ | 18,295,000 | | |
$ | 884,000 | | |
$ | 2,074,000 | | |
$ | 4,377,000 | | |
$ | 173,000 | | |
$ | 2,056,000 | | |
$ | 27,952,000 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Interest expense | |
$ | 124,000 | | |
$ | - | | |
$ | 221,000 | | |
$ | 338,000 | | |
$ | 7,898,000 | | |
$ | 2,344,000 | | |
$ | 4,383,000 | | |
$ | 29,006,000 | | |
$ | 44,314,000 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Capital expenditures for the year ended
December31, 2023 | |
$ | 145,000 | | |
$ | - | | |
$ | 2,019,000 | | |
$ | 383,000 | | |
$ | 6,347,000 | | |
$ | 3,603,000 | | |
$ | 479,000 | | |
$ | 1,766,000 | | |
$ | 14,742,000 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Segment identifiable assets as of December 31,
2023 | |
$ | 4,717,000 | | |
$ | 17,027,000 | | |
$ | 59,903,000 | | |
$ | - | | |
$ | 90,991,000 | | |
$ | 51,254,000 | | |
$ | 9,920,000 | | |
$ | 32,716,000 | | |
$ | 266,528,000 | | |
|
Assets of discontinued operations | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 32,367,000 | | |
|
Total identifiable assets as of December 31,
2023 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 298,895,000 | | |
**33.CONCENTRATIONS OF CREDIT AND REVENUE RISK**
Significant customers are those that represent
more than 10% of the Companys total revenue or accounts receivable balances for the periods and as of each balance sheet date presented.
For each significant customer, revenue as a percentage of total revenue and gross accounts receivable as a percentage of total gross accounts
receivable as of the periods presented were as follows:
|
Schedule of concentrations of credit and revenue risk | |
| |
| |
| |
| |
|
| |
Accounts Receivable | |
Revenue | |
|
| |
December 31, | |
December 31, | |
For the Year Ended December 31, | |
|
| |
2024 | |
2023 | |
2024 | |
2023 | |
|
Customer A | |
* | |
* | |
23% | |
13% | |
|
Customer B | |
19% | |
17% | |
* | |
* | |
|
Customer C | |
10% | |
13% | |
* | |
* | |
|
* | less than 10% |
|
**34. SUBSEQUENT EVENTS**
**Issuances of Series D Preferred Stock**
From January 1, 2025 through April 14,
2025, the Company issued a total of 135,957
shares of its Series D preferred stock for the settlement of ELOC advances totaling $2.0
million.
| | F-51 | | |
| | |
**OID Only Term Note**
On January 14, 2025, the Company entered
into a term note agreement with institutional investors for $2.5 million. The term note was issued at a discount, with net proceeds to
the Company of $2.2 million. The term note does not accrue any interest. The term note was scheduled to mature on March 1, 2025. The term
note is guaranteed by Mr. Ault.
**15% Promissory Note**
On March 7, 2025, the Company entered into
a promissory note agreement with an institutional investor with a principal amount of $0.5 million and an interest rate of 15%. The maturity
date of the promissory note is December 7, 2025. Mr. Ault entered into a personal guaranty agreement for the benefit of the investor.
**March 2025 Convertible Promissory Note**
On March 21, 2025 the Company entered into
an exchange agreement with SJC Lending, LLC, a Delaware limited liability company (SJC), pursuant to which the Company issued
to SJC a convertible promissory note in the principal face amount of $4.9million (the Note) in exchange for the cancellation
of the following notes the Company issued to Steve J. Caspi, the sole member of SJC, who transferred such notes to SJC, (i) a term note
issued on January 14, 2025 in the principal face amount of $2.5 million, (ii) a promissory note issued on March 7, 2025 in the principal
face amount of $0.5 million, (iii) a promissory note issued on March 12, 2025 in the principal face amount of $1.5million and (iv)
a promissory note issued on March 13, 2025 in the principal face amount of $0.3 million.
The Note accrues interest at the rate of
15% per annum, unless an event of default (as defined in the Note) occurs, at which time the Note would accrue interest at 18% per annum.
The Note will mature on December 31, 2025. The Note is convertible into shares of Class A common stock at any time after NYSE American
(NYSE) approval of the Supplemental Listing Application (the SLAP) at a conversion price equal to the greater
of (i) $0.40 per share (the Floor Price), which Floor Price shall not be adjusted for stock dividends, stock splits, stock
combinations and other similar transactions and (ii) the lesser of 75% of the VWAP (as defined in the Note) of the Class A common stock
during the five trading days immediately prior to (A) the date of issuance of the Note or (B) the date of conversion into shares of Class
A common stock, but not greater than $10.00 per share (the Maximum Price), which Maximum Price shall be adjusted for stock
dividends, stock splits, stock combinations and other similar transactions.
**Amendment to Securities Purchase Agreement**
On March 30, 2025, the Company entered into
an amendment to the (i) November 2023 Securities Purchase Agreement (the SPA) with Ault & Company and (ii) the related
Certificate of Designation of Preferences, Rights and Limitations of the Series C Convertible Preferred Stock, to (A) eliminate the ability
of the purchaser to satisfy the purchase price for the securities through the surrender of a portion of the outstanding note, thereby
requiring that all future closings under the SPA be funded solely in cash, and (B) extend the outside date by which the final closing
may occur to March 31, 2025, subject to the purchasers right to further extend such date for an additional ninety (90) days.
**April 2025 Convertible Promissory Note**
On April 1, 2025, the Company issued to
an institutional investor, a convertible promissory note in the principal face amount of $1.7 million (the April 2025 Note)
in consideration for an advance of $1.5 million previously made by the investor to the Company (the Transaction). The April
2025 Note has a principal face amount of $1.7 million and was issued with an OID of 10%. The April 2025 Note accrues interest at the rate
of 15% per annum, unless an event of default (as defined in the April 2025 Note) occurs, at which time the April 2025 Note would accrue
interest at 18% per annum. The April 2025 Note will mature on September 30, 2025. The April 2025 Note is convertible into shares of the
Companys class A common stock at any time after NYSE approval of the SLAP at a conversion price equal to the greater of (i) $0.40
per share, which shall not be adjusted for stock dividends, stock splits, stock combinations and other similar transactions and (ii) the
lesser of 75% of the VWAP (as defined in the April 2025 Note) of the Class A common stock during the five trading days immediately prior
to the closing date or the date of conversion.
**Series B Convertible Preferred Stock Securities Purchase
Agreement**
On March 31, 2025 (the Execution
Date), the Company entered into a Securities Purchase Agreement (the Series B Agreement) with SJC, pursuant to which
the Company agreed to sell to SJC up to 50,000 shares of Series B convertible preferred stock (the Series B Convertible Preferred
Stock), which are convertible into the Companys Class A common stock for a total purchase price of up to $50.0 million (the
Preferred Transaction).
| | F-52 | | |
| | |
The consummation of the transactions contemplated
by the Series B Agreement, specifically the conversion of the Series G Convertible Preferred Stock in an aggregate number in excess of
19.99% on the execution date of the Series B Agreement, are subject to various customary closing conditions as well as regulatory and
stockholder approval.
The Series B Agreement contains customary
termination provisions for the Purchaser under certain circumstances, and the Series B Agreement shall automatically terminate if the
closing has not occurred prior to June 30, 2025, though such date may be extended by SJC as set forth in the Series B Agreement. The Series
B Agreement provides that the Financing may be conducted through up to 49 closings.
The material terms of the Series B Agreement
and the Series B Convertible Preferred Stock are summarized below.
Description of the Series B Agreement
Holders of the Series B Preferred Stock
are entitled to written notice of stockholder meetings or written consents, along with related materials and information, in accordance
with the Companys Bylaws and the Delaware General Corporation Law.
The Series B Agreement provides that the
Preferred Transaction shall be conducted through 49 separate Tranche Closings, provided, however, that the Investor has the ability, exercisable
in its sole discretion, to purchase any number of shares of Series B Preferred Stock prior to the dates of the Tranche Closings provided
for in the Series B Agreement. Pursuant to the Series B Agreement, the initial Tranche Closing, which will close promptly after SJC has
converted out of certain convertible notes that it holds, will consist of the sale and issuance to SJC of 2,000 shares of Series B Preferred
Stock for an aggregate of $2.0 million (the Initial Tranche Closing).
Pursuant to the Series B Agreement, SJC,
provided certain closing conditions have been met, including that all underlying shares of Class A Comon Stock shall have been registered
for resale under the Securities Act of 1933, as amended (the Securities Act), shall purchase up to 4,800 shares of Series
B Preferred Stock on a monthly basis, with SJC being required to purchase 1,000 shares per month (each, a Subsequent Tranche Closing)
until all shares of Series B Preferred Stock have been issued and sold to SJC.
Commencing on the Execution Date and continuing
for a period of 90 days thereafter, neither the Company nor any subsidiary thereof shall issue, enter into any agreement to issue or announce
the issuance or proposed issuance of any shares of Common Stock or instruments convertible into, exercisable or exchangeable for such
shares of Class A common stock, with certain exceptions.
Additionally, commencing on the Execution
Date and continuing for a period of one year thereafter, the Company shall be prohibited from entering into a variable rate transaction.
From the Execution Date and continuing until
the date that is two years therefrom, SJC shall have a right of first refusal with respect to any investment proposed to be made by any
individual or entity for each and every future public or private equity offering, including a debt instrument convertible into equity
of the Company during such period.
Description of the Series B Preferred
Stock
*Conversion Rights*
Each share of Series B Preferred Stock has
a stated value of $1,000 and is convertible into shares of Class A common stock (the Conversion Shares) at a at a conversion
price equal the lesser of a 25% discount to the Companys Volume Weighted Average Price during the five trading days immediately
prior to (A) the Execution Date or (B) the date of conversion into shares of Class A common stock, but not greater than $10 per share
(the Maximum Price), which Maximum Price shall be adjusted for stock dividends, stock splits, stock combinations and other
similar transactions (the Conversion Price). Notwithstanding the foregoing, in no event shall the Series B Preferred Stock
be convertible at less than $0.40 (the Floor Price). The Conversion Price is subject to adjustment in the event of an issuance
of Class A common stock at a price per share lower than the Conversion Price then in effect, as well as upon customary stock splits, stock
dividends, combinations or similar events. The Floor Price will under no circumstances be adjusted for stock dividends, stock splits,
stock combinations or similar transactions.
*Voting Rights*
The holders of the Series B Preferred Stock
are entitled to vote with the Class A common stock as a single class on an as-converted basis, subject to applicable law provisions of
the Delaware General Corporation Law and the NYSE American (at times referred to as the Exchange), provided however, that
for purposes of complying with Exchange regulations, the conversion price, for purposes of determining the number of votes the holder
of Series B Convertible Preferred Stock is entitled to cast, shall not be lower than $2.44 (the Voting Floor Price), which
represents the closing sale price of the Class A common stock on the trading day immediately prior to the Execution Date. The Voting Floor
Price shall be adjusted for stock dividends, stock splits, stock combinations and other similar transactions.
| | F-53 | | |
| | |
*Dividend Rights*
The holders of Series B Convertible Preferred
Stock are entitled to cumulative cash dividends at an annual rate of 15%, or $150 per share, based on the stated value per share. Dividends
shall accrue from the date of the Initial Tranche Closing, for as long as any shares of Series B Preferred Stock remain issued and outstanding
and are payable monthly in arrears. For the first two years, the Company may elect to pay the dividend amount in Class A common stock
(the PIK Shares) rather than cash, with the number of shares of Class A common stock issued at the Conversion Price at the
date that the dividend payment is due. Dividends will accrue regardless of the Companys earnings or funds availability and will
not exceed the full cumulative dividends.
*Liquidation Rights*
In the event of liquidation, dissolution,
or winding up of the Company, the holders of Series B Preferred Stock have a preferential right to receive an amount equal to the stated
value per share of Series B Preferred Stock before any distribution to other classes of capital stock, provided, however, that it ranks
on a pari passu basis with the Series C Preferred Stock and the Series G Preferred Stock. If the assets are insufficient, the distribution
will be prorated among the holders of Series B Preferred Stock, Series C Preferred Stock and Series G Preferred Stock. The remaining assets
will be distributed pro rata to the holders of outstanding Capital Stock and all holders of Series B Preferred Stock as if they had converted
their Series B Preferred Stock into Class A common stock. The Series B Preferred Stock rank senior over other classes of preferred stock,
including the Series A, D, E and F Preferred Stock. Additionally, any transaction that constitutes a change of control transaction shall
be deemed to be a liquidation under the Certificate of Designation of the Preferences, Rights and Limitations of Series B Convertible
Preferred Stock (the Series B Certificate of Designation).
The Company may not issue Conversion Shares
to the extent such issuances would result in an aggregate number of shares of Class A common stock exceeding 19.99% of the total shares
of Class A common stock issued and outstanding as of the Execution Date, in accordance with the rules and regulations of the Exchange
unless the Company first obtains stockholder approval (the Stockholder Approval). Pursuant to the Series B Agreement and
as required by the Exchange, the Company agreed to file a proxy statement to obtain the Stockholder Approval.
F-54